UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| | |
x | ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended September 30, 2018 |
For the quarterly period ended September 30, 2019
Or
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| | |
o | ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| | | |
| For the transition period from | | to | |
For the transition period from to
Commission File No. 001-16427
Fidelity National Information Services, Inc.
(Exact name of registrant as specified in its charter)
|
| | | |
| Georgia | | | 37-1490331 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
of incorporation or organization) | | | |
| | | |
| 601 Riverside Avenue | | | |
| Jacksonville | Florida | | 32204 |
| (Address of principal executive offices) | | (Zip Code) |
(904) (904) 438-6000
(Registrant’s telephone number, including area code)
(Former Name or Former Address, if Changed Since Last Report)
|
| | | | |
| Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
| | Trading | | Name of each exchange |
| Title of each class | | Symbol(s) | | on which registered |
| Common Stock, par value $0.01 per share | | FIS | | New York Stock Exchange |
| 0.400% Senior Notes due 2021 | | FIS21A | | New York Stock Exchange |
| Floating Rate Senior Notes due 2021 | | FIS21B | | New York Stock Exchange |
| 0.125% Senior Notes due 2021 | | FIS21C | | New York Stock Exchange |
| 1.700% Senior Notes due 2022 | | FIS22B | | New York Stock Exchange |
| 0.750% Senior Notes due 2023 | | FIS23A | | New York Stock Exchange |
| 1.100% Senior Notes due 2024 | | FIS24A | | New York Stock Exchange |
| 2.602% Senior Notes due 2025 | | FIS25A | | New York Stock Exchange |
| 1.500% Senior Notes due 2027 | | FIS27 | | New York Stock Exchange |
| 2.000% Senior Notes due 2030 | | FIS30 | | New York Stock Exchange |
| 3.360% Senior Notes due 2031 | | FIS31 | | New York Stock Exchange |
| 2.950% Senior Notes due 2039 | | FIS39 | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO oYes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filerx | ☒ | Accelerated filero | ☐ |
Non-accelerated filer o(Do not check if a smaller reporting company)
| ☐ | Smaller reporting companyo | ☐ |
| | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o☐ NO x☒
As of October 29, 2018, 327,488,268November 4, 2019, 614,600,305 shares of the Registrant’s Common Stock were outstanding.
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 20182019
INDEX
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EX-31.1 | |
EX-31.2 | |
EX-32.1 | |
EX-32.2 | |
EX-101 INSTANCE DOCUMENT | |
EX-101 SCHEMA DOCUMENT | |
EX-101 CALCULATION LINKBASE DOCUMENT | |
EX-101 DEFINITION LINKBASE DOCUMENT | |
EX-101 LABELS LINKBASE DOCUMENT | |
EX-101 PRESENTATION LINKBASE DOCUMENT | |
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
| | | | September 30, 2018 | | December 31, 2017 | | | | | |
| | | | As Adjusted * | September 30, 2019 | | December 31, 2018 |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 632 |
| | $ | 665 |
| $ | 1,305 |
| | $ | 703 |
|
| Settlement deposits | 563 |
| | 677 |
| |
Trade receivables, net of allowance for doubtful accounts of $29 and $63 as of
September 30, 2018 and December 31, 2017, respectively | 1,398 |
| | 1,624 |
| |
| Settlement deposits and merchant float | | 3,476 |
| | 700 |
|
Trade receivables, net of allowance for doubtful accounts of $37 and $17 as of
September 30, 2019 and December 31, 2018, respectively | | 3,065 |
| | 1,472 |
|
| Contract assets | 115 |
| | 108 |
| 153 |
| | 123 |
|
| Settlement receivables | 386 |
| | 291 |
| 755 |
| | 281 |
|
| Other receivables | 198 |
| | 70 |
| 269 |
| | 166 |
|
| Prepaid expenses and other current assets | 252 |
| | 253 |
| 302 |
| | 288 |
|
| Assets held for sale | 53 |
| | — |
| |
| Total current assets | 3,597 |
| | 3,688 |
| 9,325 |
| | 3,733 |
|
| Property and equipment, net | 546 |
| | 610 |
| 811 |
| | 587 |
|
| Goodwill | 13,585 |
| | 13,730 |
| 51,890 |
| | 13,545 |
|
| Intangible assets, net | 3,304 |
| | 3,885 |
| 16,083 |
| | 3,132 |
|
| Computer software, net | 1,710 |
| | 1,728 |
| 3,025 |
| | 1,795 |
|
| Other noncurrent assets | | 1,996 |
| | 503 |
|
| Deferred contract costs, net | 442 |
| | 354 |
| 588 |
| | 475 |
|
| Other noncurrent assets | 510 |
| | 531 |
| |
| Total assets | $ | 23,694 |
| | $ | 24,526 |
| $ | 83,718 |
| | $ | 23,770 |
|
| LIABILITIES AND EQUITY | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable and accrued liabilities | $ | 1,007 |
| | $ | 1,241 |
| |
| Accounts payable, accrued and other liabilities | | $ | 2,143 |
| | $ | 1,099 |
|
| Settlement payables | 925 |
| | 949 |
| 4,791 |
| | 972 |
|
| Deferred revenue | 692 |
| | 776 |
| 719 |
| | 739 |
|
| Short-term borrowings | | 3,169 |
| | 267 |
|
| Current portion of long-term debt | 40 |
| | 1,045 |
| 79 |
| | 48 |
|
| Liabilities held for sale | 28 |
| | — |
| |
| Total current liabilities | 2,692 |
| | 4,011 |
| 10,901 |
| | 3,125 |
|
| Long-term debt, excluding current portion | 8,998 |
| | 7,718 |
| 16,945 |
| | 8,670 |
|
| Deferred income taxes | 1,402 |
| | 1,468 |
| 4,198 |
| | 1,360 |
|
| Other long-term liabilities | | 2,411 |
| | 326 |
|
| Deferred revenue | 61 |
| | 106 |
| 51 |
| | 67 |
|
| Other long-term liabilities | 375 |
| | 403 |
| |
| Total liabilities | 13,528 |
| | 13,706 |
| 34,506 |
| | 13,548 |
|
| Equity: | | | | | | |
| FIS stockholders’ equity: | | | | | | |
| Preferred stock, $0.01 par value, 200 shares authorized, none issued and outstanding as of September 30, 2018 and December 31, 2017 | — |
| | — |
| |
| Common stock, $0.01 par value, 600 shares authorized, 433 and 432 shares issued as of September 30, 2018 and December 31, 2017 | 4 |
| | 4 |
| |
| Preferred stock, $0.01 par value, 200 shares authorized, none issued and outstanding as of September 30, 2019 and December 31, 2018 | | — |
| | — |
|
| Common stock, $0.01 par value, 750 and 600 shares authorized, 615 and 433 shares issued as of September 30, 2019 and December 31, 2018 | | 6 |
| | 4 |
|
| Additional paid in capital | 10,715 |
| | 10,534 |
| 45,063 |
| | 10,800 |
|
| Retained earnings | 4,339 |
| | 4,109 |
| 4,538 |
| | 4,528 |
|
| Accumulated other comprehensive earnings (loss) | (433 | ) | | (332 | ) | (391 | ) | | (430 | ) |
| Treasury stock, 105 and 99 shares as of September 30, 2018 and December 31, 2017, respectively, at cost | (4,544 | ) | | (3,604 | ) | |
| Treasury stock, $0.01 par value, less than 1 and 106 common shares as of September 30, 2019 and December 31, 2018, respectively, at cost | | (21 | ) | | (4,687 | ) |
| Total FIS stockholders’ equity | 10,081 |
| | 10,711 |
| 49,195 |
| | 10,215 |
|
| Noncontrolling interest | 85 |
| | 109 |
| 17 |
| | 7 |
|
| Total equity | 10,166 |
| | 10,820 |
| 49,212 |
| | 10,222 |
|
| Total liabilities and equity | $ | 23,694 |
| | $ | 24,526 |
| $ | 83,718 |
| | $ | 23,770 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
* See Note 3.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In millions, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| Revenue | $ | 2,822 |
| | $ | 2,084 |
| | $ | 6,991 |
| | $ | 6,256 |
|
| Cost of revenue | 1,838 |
| | 1,364 |
| | 4,623 |
| | 4,192 |
|
| Gross profit | 984 |
| | 720 |
| | 2,368 |
| | 2,064 |
|
| Selling, general and administrative expenses | 757 |
| | 283 |
| | 1,435 |
| | 980 |
|
| Asset impairments | 87 |
| | 95 |
| | 87 |
| | 95 |
|
| Operating income | 140 |
| | 342 |
| | 846 |
| | 989 |
|
| Other income (expense): | | | | | | | |
| Interest expense, net | (95 | ) | | (80 | ) | | (242 | ) | | (225 | ) |
| Other income (expense), net | 164 |
| | (58 | ) | | (8 | ) | | (60 | ) |
| Total other income (expense), net | 69 |
| | (138 | ) | | (250 | ) | | (285 | ) |
| Earnings before income taxes and equity method investment earnings (loss) | 209 |
| | 204 |
| | 596 |
| | 704 |
|
| Provision (benefit) for income taxes | 48 |
| | 37 |
| | 119 |
| | 122 |
|
| Equity method investment earnings (loss) | (5 | ) | | (4 | ) | | (18 | ) | | (11 | ) |
| Net earnings | 156 |
| | 163 |
| | 459 |
| | 571 |
|
| Net (earnings) loss attributable to noncontrolling interest | (2 | ) | | (9 | ) | | (3 | ) | | (23 | ) |
| Net earnings attributable to FIS common stockholders | $ | 154 |
| | $ | 154 |
| | $ | 456 |
| | $ | 548 |
|
| | | | | | | | |
| Net earnings per share — basic attributable to FIS common stockholders | $ | 0.30 |
| | $ | 0.47 |
| | $ | 1.18 |
| | $ | 1.67 |
|
| Weighted average shares outstanding — basic | 516 |
| | 328 |
| | 388 |
| | 329 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.29 |
| | $ | 0.47 |
| | $ | 1.15 |
| | $ | 1.65 |
|
| Weighted average shares outstanding — diluted | 524 |
| | 331 |
| | 396 |
| | 333 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | As Adjusted * | | | | As Adjusted * |
| Revenue | $ | 2,084 |
| | $ | 2,096 |
| | $ | 6,256 |
| | $ | 6,502 |
|
| Cost of revenue | 1,364 |
| | 1,386 |
| | 4,192 |
| | 4,397 |
|
| Gross profit | 720 |
| | 710 |
| | 2,064 |
| | 2,105 |
|
| Selling, general, and administrative expenses | 283 |
| | 325 |
| | 980 |
| | 1,104 |
|
| Asset impairments | 95 |
| | — |
| | 95 |
| | — |
|
| Operating income | 342 |
| | 385 |
| | 989 |
| | 1,001 |
|
| Other income (expense): | | | | | | | |
| Interest expense, net | (80 | ) | | (84 | ) | | (225 | ) | | (267 | ) |
| Other income (expense), net | (58 | ) | | (182 | ) | | (60 | ) | | (123 | ) |
| Total other income (expense), net | (138 | ) | | (266 | ) | | (285 | ) | | (390 | ) |
| Earnings before income taxes and equity method investment earnings (loss) | 204 |
| | 119 |
| | 704 |
| | 611 |
|
| Provision (benefit) for income taxes | 37 |
| | 50 |
| | 122 |
| | 260 |
|
| Equity method investment earnings (loss) | (4 | ) | | — |
| | (11 | ) | | — |
|
| Net earnings | 163 |
| | 69 |
| | 571 |
| | 351 |
|
| Net (earnings) loss attributable to noncontrolling interest | (9 | ) | | (10 | ) | | (23 | ) | | (24 | ) |
| Net earnings attributable to FIS common stockholders | $ | 154 |
| | $ | 59 |
| | $ | 548 |
| | $ | 327 |
|
| | | | | | | | |
| Net earnings per share — basic attributable to FIS common stockholders | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.67 |
| | $ | 0.99 |
|
| Weighted average shares outstanding — basic | 328 |
| | 331 |
| | 329 |
| | 330 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.65 |
| | $ | 0.98 |
|
| Weighted average shares outstanding — diluted | 331 |
| | 336 |
| | 333 |
| | 335 |
|
| Cash dividends paid per share | $ | 0.32 |
| | $ | 0.29 |
| | $ | 0.96 |
| | $ | 0.87 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
* See Note 3.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings
(In millions)
(Unaudited)
| | | | Three months ended September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | As Adjusted * | | | | | | As Adjusted * | | | | | | | | | | | | | | | |
| Net earnings | | | $ | 163 |
| | | | $ | 69 |
| | | | $ | 571 |
| | | | $ | 351 |
| | | $ | 156 |
| | | | $ | 163 |
| | | | $ | 459 |
| | | | $ | 571 |
|
| Other comprehensive earnings, before tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain (loss) on investments and derivatives | $ | — |
| | | | $ | 5 |
| | | | $ | — |
| | | | $ | (28 | ) | | | |
| Reclassification adjustment for gain (loss) included in net earnings | — |
| | | | — |
| | | | — |
| | | | — |
| | | |
| Unrealized gain (loss) on investments and derivatives, net | — |
| | | | 5 |
| | | | — |
| | | | (28 | ) | | | |
| Unrealized gain (loss) on derivatives | | $ | — |
| | | | $ | — |
| | | | $ | (16 | ) | | | | $ | — |
| | |
| Reclassification adjustment for (gains) losses included in net earnings | | 1 |
| | | | — |
| | | | (3 | ) | | | | — |
| | |
| Unrealized gain (loss) on derivatives, net | | 1 |
| | | | — |
| | | | (19 | ) | | | | — |
| | |
| Foreign currency translation adjustments | (35 | ) | | | | 46 |
| | | | (123 | ) | | | | 20 |
| | | 81 |
| | | | (35 | ) | | | | 98 |
| | | | (123 | ) | | |
| Minimum pension liability adjustment | — |
| | | | — |
| | | | — |
| | | | (10 | ) | | | — |
| | | | — |
| | | | (4 | ) | | | | — |
| | |
| Other comprehensive earnings (loss), before tax: | (35 | ) | | | | 51 |
| | | | (123 | ) | | | | (18 | ) | | | 82 |
| | | | (35 | ) | | | | 75 |
| | | | (123 | ) | | |
| Provision for income tax expense (benefit) related to items of other comprehensive earnings | — |
| | | | 2 |
| | | | — |
| | | | (11 | ) | | | 35 |
| | | | — |
| | | | 36 |
| | | | — |
| | |
| Other comprehensive earnings (loss), net of tax | $ | (35 | ) | | (35 | ) | | $ | 49 |
| | 49 |
| | $ | (123 | ) | | (123 | ) | | $ | (7 | ) | | (7 | ) | $ | 47 |
| | 47 |
| | $ | (35 | ) | | (35 | ) | | $ | 39 |
| | 39 |
| | $ | (123 | ) | | (123 | ) |
| Comprehensive earnings: | | | 128 |
| | | | 118 |
| | | | 448 |
| | | | 344 |
| | | 203 |
| | | | 128 |
| | | | 498 |
| | | | 448 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | (9 | ) | | | | (10 | ) | | | | (23 | ) | | | | (24 | ) | | | (2 | ) | | | | (9 | ) | | | | (3 | ) | | | | (23 | ) |
| Other comprehensive (earnings) loss attributable to noncontrolling interest | | | 5 |
| | | | (4 | ) | | | | 22 |
| | | | (2 | ) | | | — |
| | | | 5 |
| | | | — |
| | | | 22 |
|
| Comprehensive earnings attributable to FIS common stockholders | | | $ | 124 |
| | | | $ | 104 |
| | | | $ | 447 |
| | | | $ | 318 |
| | | $ | 201 |
| | | | $ | 124 |
| | | | $ | 495 |
| | | | $ | 447 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
* See Note 3.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated StatementStatements of Equity
NineThree and nine months ended September 30, 20182019
(In millions, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Amount |
| | | | | | FIS Stockholders | | | | |
| | | | | | | | | | | | Accumulated | | | | | | |
| | Number of shares | | | | Additional | | | | other | | | | | | |
| | Common | | Treasury | | Common | | paid in | | Retained | | comprehensive | | Treasury | | Noncontrolling | | Total |
| | shares | | shares | | stock | | capital | | earnings | | earnings (loss) | | stock | | interest | | equity |
| Balances, June 30, 2019 | 433 |
| | (109 | ) | | $ | 4 |
| | $ | 10,887 |
| | $ | 4,599 |
| | $ | (438 | ) | | $ | (5,067 | ) | | $ | 7 |
| | $ | 9,992 |
|
| Worldpay acquisition | 180 |
| | 109 |
| | 2 |
| | 34,040 |
| | | | | | 5,042 |
| | 11 |
| | 39,095 |
|
| Issuance of restricted stock | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Exercise of stock options | 1 |
| | — |
| | — |
| | 42 |
| | — |
| | — |
| | 3 |
| | — |
| | 45 |
|
| Treasury shares held for taxes due upon exercise of stock options | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (2 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 95 |
| | — |
| | — |
| | — |
| | — |
| | 95 |
|
| Cash dividends paid ($0.35 per share per quarter) and other distributions | — |
| | — |
| | — |
| | — |
| | (215 | ) | | — |
| | — |
| | (3 | ) | | (218 | ) |
| Net earnings | — |
| | — |
| | — |
| | — |
| | 154 |
| | — |
| | — |
| | 2 |
| | 156 |
|
| Other comprehensive earnings, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 47 |
| | — |
| | — |
| | 47 |
|
| Balances, September 30, 2019 | 615 |
| | — |
| | $ | 6 |
| | $ | 45,063 |
| | $ | 4,538 |
| | $ | (391 | ) | | $ | (21 | ) | | $ | 17 |
| | $ | 49,212 |
|
| | | | | | | | Amount | | | | | Amount |
| | | | | | FIS Stockholders | | | | | | | | | FIS Stockholders | | | | |
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | Accumulated | | | | | | |
| | Number of shares | | | | Additional | | | | other | | | | | | | Number of shares | | | | Additional | | | | other | | | | | | |
| | Common | | Treasury | | Common | | paid in | | Retained | | comprehensive | | Treasury | | Noncontrolling | | Total | Common | | Treasury | | Common | | paid in | | Retained | | comprehensive | | Treasury | | Noncontrolling | | Total |
| | shares | | shares | | stock | | capital | | earnings | | earnings | | stock | | interest | | equity | shares | | shares | | stock | | capital | | earnings | | earnings (loss) | | stock | | interest | | equity |
| Balances, December 31, 2017, as adjusted * | 432 |
| | (99 | ) | | $ | 4 |
| | $ | 10,534 |
| | $ | 4,109 |
| | $ | (332 | ) | | $ | (3,604 | ) | | $ | 109 |
| | $ | 10,820 |
| |
| Balances, December 31, 2018 | | 433 |
| | (106 | ) | | $ | 4 |
| | $ | 10,800 |
| | $ | 4,528 |
| | $ | (430 | ) | | $ | (4,687 | ) | | $ | 7 |
| | $ | 10,222 |
|
| Worldpay acquisition | | 180 |
| | 109 |
| | 2 |
| | 34,040 |
| | | | | | 5,042 |
| | 11 |
| | 39,095 |
|
| Issuance of restricted stock | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Exercise of stock options | — |
| | 4 |
| | — |
| | 126 |
| | — |
| | — |
| | 146 |
| | — |
| | 272 |
| 1 |
| | 1 |
| | — |
| | 86 |
| | — |
| | — |
| | 46 |
| | — |
| | 132 |
|
| Treasury shares held for taxes due upon exercise of stock options | — |
| | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (20 | ) | | — |
| | (31 | ) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (24 | ) | | — |
| | (25 | ) |
| Purchases of treasury stock | — |
| | (10 | ) | | — |
| | — |
| | — |
| | — |
| | (1,066 | ) | | — |
| | (1,066 | ) | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (400 | ) | | 1 |
| | (399 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 66 |
| | — |
| | — |
| | — |
| | — |
| | 66 |
| — |
| | — |
| | — |
| | 138 |
| | — |
| | — |
| | — |
| | — |
| | 138 |
|
| Cash dividends paid ($0.32 per share per quarter) and other distributions | — |
| | — |
| | — |
| | — |
| | (318 | ) | | — |
| | — |
| | (25 | ) | | (343 | ) | |
| Cash dividends paid ($0.35 per share per quarter) and other distributions | | — |
| | — |
| | — |
| | — |
| | (441 | ) | | — |
| | — |
| | (5 | ) | | (446 | ) |
| Other | | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Net earnings | — |
| | — |
| | — |
| | — |
| | 548 |
| | — |
| | — |
| | 23 |
| | 571 |
| — |
| | — |
| | — |
| | — |
| | 456 |
| | — |
| | — |
| | 3 |
| | 459 |
|
| Other comprehensive earnings, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (101 | ) | | — |
| | (22 | ) | | (123 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | 39 |
| | — |
| | — |
| | 39 |
|
| Balances, September 30, 2018 | 433 |
| | (105 | ) | | $ | 4 |
| | $ | 10,715 |
| | $ | 4,339 |
| | $ | (433 | ) | | $ | (4,544 | ) | | $ | 85 |
| | $ | 10,166 |
| |
| Balances, September 30, 2019 | | 615 |
| | — |
| | $ | 6 |
| | $ | 45,063 |
| | $ | 4,538 |
| | $ | (391 | ) | | $ | (21 | ) | | $ | 17 |
| | $ | 49,212 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
*
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
Three and nine months ended September 30, 2018
(In millions, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Amount |
| | | | | | FIS Stockholders | | | | |
| | | | | | | | | | | | Accumulated | | | | | | |
| | Number of shares | | | | Additional | | | | other | | | | | | |
| | Common | | Treasury | | Common | | paid in | | Retained | | comprehensive | | Treasury | | Noncontrolling | | Total |
| | shares | | shares | | stock | | capital | | earnings | | earnings (loss) | | stock | | interest | | equity |
| Balances, June 30, 2018 | 433 |
| | (102 | ) | | $ | 4 |
| | $ | 10,659 |
| | $ | 4,291 |
| | $ | (403 | ) | | $ | (4,112 | ) | | $ | 105 |
| | $ | 10,544 |
|
| Issuance of restricted stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | — |
| | 1 |
| | — |
| | 35 |
| | — |
| | — |
| | 33 |
| | — |
| | 68 |
|
| Treasury shares held for taxes due upon exercise of stock options | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| �� | — |
|
| Purchases of treasury stock | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (465 | ) | | — |
| | (465 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | 21 |
|
| Cash dividends paid ($0.32 per share per quarter) and other distributions | — |
| | — |
| | — |
| | — |
| | (106 | ) | | — |
| | — |
| | (24 | ) | | (130 | ) |
| Net earnings | — |
| | — |
| | — |
| | — |
| | 154 |
| | — |
| | — |
| | 9 |
| | 163 |
|
| Other comprehensive earnings, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (30 | ) | | — |
| | (5 | ) | | (35 | ) |
| Balances, September 30, 2018 | 433 |
| | (105 | ) | | $ | 4 |
| | $ | 10,715 |
| | $ | 4,339 |
| | $ | (433 | ) | | $ | (4,544 | ) | | $ | 85 |
| | $ | 10,166 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Amount |
| | | | | | FIS Stockholders | | | | |
| | | | | | | | | | | | Accumulated | | | | | | |
| | Number of shares | | | | Additional | | | | other | | | | | | |
| | Common | | Treasury | | Common | | paid in | | Retained | | comprehensive | | Treasury | | Noncontrolling | | Total |
| | shares | | shares | | stock | | capital | | earnings | | earnings (loss) | | stock | | interest | | equity |
| Balances, December 31, 2017 | 432 |
| | (99 | ) | | $ | 4 |
| | $ | 10,534 |
| | $ | 4,109 |
| | $ | (332 | ) | | $ | (3,604 | ) | | $ | 109 |
| | $ | 10,820 |
|
| Issuance of restricted stock | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercise of stock options | — |
| | 4 |
| | — |
| | 126 |
| | — |
| | — |
| | 146 |
| | — |
| | 272 |
|
| Treasury shares held for taxes due upon exercise of stock options | — |
| | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (20 | ) | | — |
| | (31 | ) |
| Purchases of treasury stock | — |
| | (10 | ) | | — |
| | — |
| | — |
| | — |
| | (1,066 | ) | | — |
| | (1,066 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 66 |
| | — |
| | — |
| | — |
| | — |
| | 66 |
|
| Cash dividends paid ($0.32 per share per quarter) and other distributions | — |
| | — |
| | — |
| | — |
| | (318 | ) | | — |
| | — |
| | (25 | ) | | (343 | ) |
| Net earnings | — |
| | — |
| | — |
| | — |
| | 548 |
| | — |
| | — |
| | 23 |
| | 571 |
|
| Other comprehensive earnings, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (101 | ) | | — |
| | (22 | ) | | (123 | ) |
| Balances, September 30, 2018 | 433 |
| | (105 | ) | | $ | 4 |
| | $ | 10,715 |
| | $ | 4,339 |
| | $ | (433 | ) | | $ | (4,544 | ) | | $ | 85 |
| | $ | 10,166 |
|
See Note 3.accompanying notes to unaudited condensed consolidated financial statements.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, |
| | 2019 | | 2018 |
| Cash flows from operating activities: | | | |
| Net earnings | $ | 459 |
| | $ | 571 |
|
| Adjustment to reconcile net earnings to net cash provided by operating activities: | | | |
| Depreciation and amortization | 1,488 |
| | 1,060 |
|
| Amortization of debt issue costs | 17 |
| | 13 |
|
| Acquisition-related financing foreign exchange | (112 | ) | | — |
|
| Asset impairments | 87 |
| | 95 |
|
| Loss (gain) on sale of businesses and investments | 18 |
| | 48 |
|
| Loss on extinguishment of debt | — |
| | 1 |
|
| Stock-based compensation | 138 |
| | 66 |
|
| Deferred income taxes | (75 | ) | | (65 | ) |
| Net changes in assets and liabilities, net of effects from acquisitions and foreign currency: | | | |
| Trade and other receivables | 12 |
| | 151 |
|
| Contract assets | (14 | ) | | (10 | ) |
| Settlement activity | 165 |
| | (6 | ) |
| Prepaid expenses and other assets | (2 | ) | | 31 |
|
| Deferred contract costs | (258 | ) | | (180 | ) |
| Deferred revenue | (51 | ) | | (122 | ) |
| Accounts payable, accrued liabilities, and other liabilities | (131 | ) | | (365 | ) |
| Net cash provided by operating activities | 1,741 |
| | 1,288 |
|
| | | | |
| Cash flows from investing activities: | | | |
| Additions to property and equipment | (135 | ) | | (115 | ) |
| Additions to computer software | (409 | ) | | (349 | ) |
| Acquisitions, net of cash acquired | (6,629 | ) | | — |
|
| Net proceeds from sale of businesses and investments | 49 |
| | 58 |
|
| Other investing activities, net | (43 | ) | | (26 | ) |
| Net cash provided by (used in) investing activities | (7,167 | ) | | (432 | ) |
| | | | |
| Cash flows from financing activities: | | | |
| Borrowings | 25,425 |
| | 8,068 |
|
| Repayment of borrowings and other financing obligations | (15,997 | ) | | (7,725 | ) |
| Debt issuance costs | (71 | ) | | (30 | ) |
| Proceeds from exercise of stock options | 136 |
| | 273 |
|
| Treasury stock activity | (422 | ) | | (1,038 | ) |
| Dividends paid | (441 | ) | | (316 | ) |
| Distribution to Brazilian Venture partner | — |
| | (23 | ) |
| Other financing activities, net | (39 | ) | | (3 | ) |
| Net cash provided by (used in) financing activities | 8,591 |
| | (794 | ) |
| | | | |
| Effect of foreign currency exchange rate changes on cash | (38 | ) | | (56 | ) |
| Less net change in cash balances classified as assets held-for-sale | — |
| | (39 | ) |
| Net increase (decrease) in cash and cash equivalents | 3,127 |
| | (33 | ) |
| Cash and cash equivalents, beginning of period | 703 |
| | 665 |
|
| Cash and cash equivalents, end of period | $ | 3,830 |
| | $ | 632 |
|
| | | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 208 |
| | $ | 199 |
|
| Cash paid for income taxes | $ | 273 |
| | $ | 442 |
|
|
| | | | | | | |
| | Nine months ended September 30, |
| | 2018 | | 2017 |
| Cash flows from operating activities: | | | As Adjusted * |
| Net earnings | $ | 571 |
| | $ | 351 |
|
| Adjustment to reconcile net earnings to net cash provided by operating activities: | | | |
| Depreciation and amortization | 1,060 |
| | 1,015 |
|
| Amortization of debt issue costs | 13 |
| | 15 |
|
| Asset impairments | 95 |
| | — |
|
| Loss (gain) on sale of businesses | 48 |
| | (55 | ) |
| Loss on extinguishment of debt | 1 |
| | 192 |
|
| Stock-based compensation | 66 |
| | 86 |
|
| Deferred income taxes | (65 | ) | | (196 | ) |
| Net changes in assets and liabilities, net of effects from acquisitions and foreign currency: | | | |
| Trade receivables | 151 |
| | (187 | ) |
| Contract assets | (10 | ) | | 77 |
|
| Settlement activity | (6 | ) | | (27 | ) |
| Prepaid expenses and other assets | 31 |
| | (20 | ) |
| Deferred contract costs | (180 | ) | | (111 | ) |
| Deferred revenue | (122 | ) | | (51 | ) |
| Accounts payable, accrued liabilities, and other liabilities | (365 | ) | | (10 | ) |
| Net cash provided by operating activities | 1,288 |
| | 1,079 |
|
| | | | |
| Cash flows from investing activities: | | | |
| Additions to property and equipment | (115 | ) | | (98 | ) |
| Additions to computer software | (349 | ) | | (350 | ) |
| Proceeds from sale of businesses | 58 |
| | 1,307 |
|
| Other investing activities, net | (26 | ) | | (3 | ) |
| Net cash provided by (used in) investing activities | (432 | ) | | 856 |
|
| | | | |
| Cash flows from financing activities: | | | |
| Borrowings | 8,068 |
| | 7,900 |
|
| Repayment of borrowings and capital lease obligations | (7,725 | ) | | (9,594 | ) |
| Debt issuance costs | (30 | ) | | (13 | ) |
| Proceeds from exercise of stock options | 273 |
| | 168 |
|
| Treasury stock activity | (1,038 | ) | | (46 | ) |
| Dividends paid | (316 | ) | | (289 | ) |
| Distribution to Brazilian Venture partner | (23 | ) | | (23 | ) |
| Other financing activities, net | (3 | ) | | (36 | ) |
| Net cash provided by (used in) financing activities | (794 | ) | | (1,933 | ) |
| | | | |
| Effect of foreign currency exchange rate changes on cash | (56 | ) | | 35 |
|
| Less net change in cash balances classified as assets held for sale | (39 | ) | | — |
|
| Net increase (decrease) in cash and cash equivalents | (33 | ) | | 37 |
|
| Cash and cash equivalents, beginning of period | 665 |
| | 683 |
|
| Cash and cash equivalents, end of period | $ | 632 |
| | $ | 720 |
|
| | | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 199 |
| | $ | 266 |
|
| Cash paid for income taxes | $ | 442 |
| | $ | 485 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
* See Note 3.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Unless stated otherwise or the context otherwise requires, all references to “FIS,” “we,” the “Company” or the “registrant” are to Fidelity National Information Services, Inc., a Georgia corporation, and its subsidiaries.
(1) Basis of Presentation
The unaudited financial information included in this report includes the accounts of FIS and its subsidiaries prepared in accordance with U.S. generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation have been included. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. The preparation of these Condensed Consolidated Financial Statements (Unaudited) in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements (Unaudited) and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates. Certain reclassifications have been made in the 20172018 Condensed Consolidated Financial Statements (Unaudited) to conform to the classifications used in 2018.2019. Amounts in tables in the financial statements and accompanying footnotes may not sum due to rounding.
The Company adopted Accounting Standards Codification Topic 606, RevenueOn March 17, 2019, FIS, Wrangler Merger Sub, Inc., a wholly owned subsidiary of FIS (“Merger Sub”), and Worldpay, Inc. (“Worldpay”) entered into an Agreement and Plan of Merger (the “merger agreement”) pursuant to which Merger Sub would merge with and into Worldpay (the “merger”), with Worldpay surviving the merger and becoming a wholly owned subsidiary of FIS (collectively, the “Worldpay acquisition”). On July 31, 2019, FIS completed the acquisition of Worldpay, and Worldpay's results of operations and financial position are included in the Condensed Consolidated Financial Statements (Unaudited) from Contracts with Customers, with aand after the date of initial application of January 1, 2018. acquisition.
As a result of the Company’s acquisition of Worldpay, the Company reorganized its reportable segments and recast all 2017 financialprior-period segment information has been adjusted forpresented to align with the implementation of Topic 606 (Note 3).
We reportnew reportable segments. The new segments are Merchant Solutions, Banking Solutions, and Capital Market Solutions, which are organized based on the results of our operations in three reporting segments: Integrated Financial Solutions (“IFS”), Global Financial Solutions (“GFS”)markets and clients served aligned with the solutions they provide, as well as the Corporate and Other (Notesegment (see Note 13).
(2) Summary of Significant Accounting Policies
| |
| (a) | Change in Accounting Policy |
(a) Revenue RecognitionThe Company adopted Topic 842, Leases, with an initial application date of January 1, 2019. As a result, the Company has changed its accounting policy for leases. The accounting policy pursuant to Topic 842 for operating leases is disclosed below. The primary impact of adopting Topic 842 is the establishment of a right-of-use (“ROU”) model that requires a lessee to recognize ROU assets and lease liabilities on the consolidated balance sheet for operating leases.
The Company generates revenue in a numberapplied Topic 842 using the effective date method; consequently, financial information was not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019. For transition purposes, the Company elected the "package of ways, including frompractical expedients," which permits the delivery of account- or transaction-based processing, software as a service ("SaaS"), business process as a service ("BPaaS"), cloud offerings, software licensing, software related services,Company not to reassess under the new standard prior conclusions about lease identification, lease classification and professional services.initial direct costs. The Company also elected the practical expedient not to separate lease and non-lease components. The Company did not elect the use-of-hindsight practical expedient nor the short-term lease recognition exemption allowed under the new standard.
The Company enters into arrangements with customers to provide services, software and software-related services such as maintenance, implementation and training either individually or as partadoption of an integrated offering of multiple services. At contract inception, the Company assesses the solutions and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a solution or service (or bundle of solutions or services) that is distinct - i.e., if a solution or service is separately identifiable from other itemsASC 842 resulted in the bundled packagerecognition of operating lease ROU assets and if a customer can benefit from it on its own or with other resources that are readily available to the customer. To identify its performance obligations, the Company considers all of the solutions or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company recognizes revenue when or as it satisfies a performance obligation by transferring control of a solution or service to a customer.
Revenue is measured basedlease liabilities on the consideration thatCompany’s Condensed Consolidated Balance Sheet (Unaudited) of $442 million and $446 million, respectively, on January 1, 2019. The standard did not impact the Company expects to receive in a contract with a customer. The Company’s contracts with its customers frequently contain variable consideration. Variable consideration exists when the amount which the Company expects to receive in a contract is based on the occurrenceresults of operations or non-occurrence of future events, such as processing services performed under usage-based pricing arrangements or professional services billed on a time and materials basis. Variable consideration is also present in certain transactions in the form of discounts, credits, price concessions, penalties, and similar items. If the amount of a discount or rebate in a contract is fixed and not contingent, that discount or rebate is not variable consideration. The Company estimates variable consideration in its contracts primarily using the expected value method. In some contracts, the Company applies the most likely amount method by considering the single most likely amount in a limited range of possible consideration amounts. The Company develops estimates of variablecash flows.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
consideration
The Company leases certain of its property, primarily real estate, under operating leases. Operating lease ROU assets are included in other noncurrent assets, and operating lease liabilities are included in accounts payable, accrued and other liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets (Unaudited). ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease ROU assets also include any prepaid lease payments and exclude lease incentives received. The Company uses an incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. Lease terms may include options to extend, generally ranging from one to five years, or to terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis of both historical informationover the lease term. Lease agreements may include lease and current trends. Variable consideration included in the transaction price is constrained such that a significant revenue reversal is not probable.
Taxes collected from customers and remitted to governmental authorities are not included in revenue. Postage costs associated with print and mail servicesrelated non-lease components, which are accounted for as a fulfillment costsingle lease component. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and are included in costliabilities.
(3) Worldpay Acquisition
On July 31, 2019, FIS completed the acquisition of revenue.
Technology or service components from third parties are frequently embedded in or combined with our applications or service offerings. We are often responsible for billing the client in these arrangements and transmitting the applicable feesWorldpay by acquiring 100 percent of Worldpay's equity pursuant to the third party.merger agreement. Through its acquisition of Worldpay, FIS is now a global leader in technology, solutions and services for merchants, as well as banks and capital markets. The Company determines whether it is responsibleWorldpay acquisition brings an integrated technology platform with a comprehensive suite of products and services serving merchants and financial institutions. Through the Worldpay acquisition, FIS has enhanced global payment capabilities, robust risk and fraud solutions and advanced data analytics.
At the closing, Worldpay shareholders received approximately 289 million shares of FIS common stock and $3.4 billion in cash, using an exchange ratio of 0.9287 FIS shares plus $11.00 in cash for providing the actual solution or service as a principal, or for arranging for the solution or service to be provided by the third party as an agent. Judgment is applied to determine whether we are the principal or the agent by evaluating whether the Company has controleach share of Worldpay common stock. The acquisition-date fair value of the solution or service prior to it being transferred to the customer. The principal versus agent assessment is performed at the performance obligation level. Indicators that the Company considers in determining if it has control include whether the Company is primarily responsible for fulfilling the promise to provide the specified solution or service to the customer, the Company has inventory risk and the Company has discretion in establishing the price the customer ultimately pays for the solution or service. Depending upon the level of our contractual responsibilities and obligations for delivering solutions to end customers, we have arrangements where we are the principal and recognize the gross amount billed to the customer and other arrangements where we are the agent and recognize the net amount retained.
Once the Company has determined the transaction price, the total transaction price is allocated to each performance obligation in a manner depicting the amount of consideration to which the Company expects to be entitled in exchange for transferring the solution(s) or service(s) to the customer (the “allocation objective”). If the allocation objective is met at contractual prices, no allocations are made. Otherwise, the Company allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis, except when the criteria are met for allocating variable consideration or a discount to one or more, but not all performance obligations in the contract. The Company allocates variable consideration to one or more, but not all performance obligations when the terms of the variable payment relate specifically to the Company’s efforts to satisfy the performance obligation (or transfer the distinct solution or service) and when such allocation is consistent with the allocation objective when considering all performance obligations in the contract. Determining whether the criteria for allocating variable consideration to one or more, but not all, performance obligations in the contract requires significant judgment and may affect the timing and amount of revenue recognized. The Company does not typically meet the requirements to allocate discounts to one or more, but not all, performance obligations in a contract.
In order to determine the standalone selling price of its promised solutions or services, the Company conducts a regular analysis to determine whether various solutions or services have an observable standalone selling price. If the Company does not have an observable standalone selling price for a particular solution or service, then standalone selling price for that particular solution or service is estimated using all information that is reasonably available and maximizing observable inputs with approaches including historical pricing, cost plus a margin, adjusted market assessment, and residual approach.
The following describes the nature289 million shares of the Company’s primary types of revenue and the revenue recognition policies and significant payment terms as they pertain to the types of transactions the Company enters into with its customers.
Processing Services Revenue
Processing services are primarily comprised of data processing and application management, including our SaaS, BPaaS, and cloud offerings. Revenue from processing services are typically volume- or activity-based depending on factors such as the number of accounts processed, transactions or trades processed, users, number of hours of services or computer resources used. The payment terms may include tiered pricing structures with the base tier representing a minimum monthly usage fee. Pricing within the tiers typically resets on a monthly basis and minimum monthly volumes are generally met or exceeded. Contract lengths for processing services typically span multiple years. Payment is generally due in advance or in arrears on a monthly or quarterly basis and may include fixed or variable payment amounts dependingcommon stock was determined based on the specific payment terms and activity inshare price of $133.69 per share, the period.
For processing services revenue, the natureclosing price of the Company’s promisecommon stock on the New York Stock Exchange on July 30, 2019, since the acquisition closed before the market opened on July 31, 2019. FIS also converted approximately 8 million outstanding Worldpay equity awards into corresponding equity awards with respect to shares of FIS common stock pursuant to an exchange ratio in the merger agreement designed to maintain the intrinsic value of the applicable award immediately prior to conversion. The fair value of the converted equity awards was approximately $789 million based on a valuation as of the date of closing. The amounts attributable to services already rendered were included as an adjustment to the customer ispurchase price and the amounts attributable to stand ready to provide continuous accessfuture services will be expensed over the remaining vesting period. In connection with the Worldpay acquisition, FIS also repaid approximately $7.5 billion of Worldpay debt, including $5.7 billion for Worldpay debt that was not contractually assumed in the acquisition and was included as an adjustment to the Company’s processing platformspurchase price. FIS funded the cash portion of the merger consideration, the pay-off of the indebtedness of Worldpay and perform an unspecified quantitythe payment of outsourcedtransaction-related expenses through a combination of available cash-on-hand and transaction-processing servicesproceeds from debt issuances, including proceeds from concurrent public offerings on May 21, 2019 of Euro-, Pound Sterling-, and U.S. Dollar-denominated senior unsecured notes and borrowings under the Euro-commercial paper program established on May 29, 2019. See Note 7 for a specified term or terms. Accordingly, processing services are generally viewedfurther discussion of these debt issuances.
The total purchase price was as follows (in millions):
|
| | | |
| Cash consideration | $ | 3,423 |
|
| Value of FIS share consideration | 38,635 |
|
| Pay-off of Worldpay long-term debt not contractually assumed | 5,738 |
|
| Value of outstanding converted equity awards attributed to services already rendered | 449 |
|
| Total purchase price | $ | 48,245 |
|
The acquisition was accounted for as a stand-ready performance obligation comprisedbusiness combination under FASB Accounting Standards Codification Topic 805, Business Combinations (“Topic 805”). We recorded a preliminary allocation of a seriesthe purchase price to Worldpay tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of distinct daily services.July 31, 2019. The Company typically satisfies its processing servicesprovisional amounts for intangible assets are based on third-party valuations performed. Goodwill was recorded as the residual
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
performance obligations over time asamount by which the services are provided. A time-elapsed output method is used to measure progress becausepurchase price exceeded the Company’s efforts are expended evenly throughout the period given the natureprovisional fair value of the promise is a stand-ready service. The Company has evaluated its variable payment terms relatednet assets acquired. Goodwill consists primarily of expected synergies of combining operations, the acquired workforce, and growth opportunities, none of which qualify as separately identifiable intangible assets. Our evaluations of the facts and circumstances available as of July 31, 2019, to its processing services revenue accountedassign fair values to assets acquired and liabilities assumed are ongoing, including our assessments of the economic characteristics of the acquired software and other intangibles. These evaluations may result in changes to the provisional amounts recorded.
Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for as a series of distinct days of service and concludedany provisional amount changes that they generally meetoccur in subsequent periods. Rather, we will recognize any provisional amount adjustments during the criteria for allocating variable consideration entirely to one or more, but not all, performance obligations in a contract. Accordingly, when the criteria are met, variable amounts based on the number and type of services performed during areporting period are allocated to and recognized on the day in which the Company performsadjustments are determined. We will also be required to record, in the related services. Fixed fees for processing services are generally recognized ratably oversame period’s financial statements, the contract period.effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
License and Software Related Revenue
The Company’spreliminary purchase price allocation was as follows (in millions):
|
| | | |
| Cash acquired | $ | 305 |
|
| Settlement deposits and merchant float (1) | 2,447 |
|
| Trade receivables | 1,619 |
|
| Goodwill | 38,428 |
|
| Intangible assets | 13,682 |
|
| Computer software | 1,293 |
|
| Other noncurrent assets (2) | 1,386 |
|
| Accounts payable, accrued and other liabilities | (1,013 | ) |
| Settlement payables | (3,167 | ) |
| Deferred income taxes | (2,822 | ) |
| Long-term debt, subsequently repaid | (1,805 | ) |
| Other liabilities and noncontrolling interest (3) | (2,108 | ) |
| Total purchase price | $ | 48,245 |
|
(1)Includes $1,693 million of merchant float.
(2)Includes $534 million of other restricted cash.
(3)Includes $890 million of long-term tax receivable agreement liability (see Note 10) and $710 million contingent value rights liability (see Note 5).
The gross contractual amount of trade receivables acquired was approximately $1,666 million. The difference between that total and the provisional amount reflected above represents our best estimate at the acquisition date of the contractual cash flows not expected to be collected. This difference was derived using Worldpay's historical bad debts, sales allowances and collection trends.
Intangible assets primarily consist of computer software, licenses generally have significant stand-alone functionalitycustomer relationship assets and trademarks with weighted average estimated useful lives of 7 years, 10 years and 5 years, respectively, and provisional fair value amounts assigned of $1,293 million, $13,272 million and $410 million, respectively.
See Note 10 for acquired contingencies resulting from the Worldpay acquisition.
Unaudited Supplemental Pro Forma Results Giving Effect to the customer upon deliveryWorldpay Acquisition
Worldpay's revenues and pre-tax loss of $734 million and $162 million, respectively, which include the impact of purchase accounting adjustments, are considered to be functional intellectual property (“IP”). Additionally,included in the natureCondensed Consolidated Statements of the Company’s promise in granting these software licenses to a customer is typically to provide the customer a right to use the Company’s intellectual property. The Company’s software licenses are generally considered distinct performance obligations, and revenue allocated to the software license is typically recognized at a point in time upon delivery of the license.
In conjunction with software licenses, the Company commonly provides the customer with additional services such as maintenance as well as associated implementation and other professional services related to the software license. Payments for maintenance are typically due annually, quarterly, or monthly in advance. Maintenance is typically comprised of technical support and unspecified updates and upgrades. The Company generally satisfies these performance obligations evenly using a time-elapsed output method over the contract term given there is no discernible pattern of performance. When a software license contract also includes professional services that provide significant modification or customization of the software license, the Company combines the software license and professional services into a single performance obligation, and revenueEarnings (Unaudited) for the combined performance obligation is recognized as the professional services are provided consistent with the methods described below for professional services revenue.period from July 31, 2019 through September 30, 2019.
The Company has contracts where the licensed software is offered in conjunction with hosting services. The licensed software may be considered a separate performance obligation from the hosting services if the customer can take possession of the software during the contractual term without incurring a significant penalty and if it is feasible for the customer to run the software on its own infrastructure or hire a third party to host the software. If the licensed software and hosting services are separately identifiable, license revenue is recognized when the hosting services commence and it is within the customer's control to obtain a copy of the software, and hosting revenue is recognized using the time-elapsed output method as the service is provided. If the software license is not separately identifiable from the hosting service, then the related revenue for the combined performance obligation is recognized ratably over the hosting period.
Occasionally, the Company offers extended payment terms on its license transactions and evaluates whether any potential significant financing components exist. For certain of its business units, the Company will provide a software license through a rental model for customers who would prefer a periodic fee instead of a larger upfront payment. Revenue recognition under these arrangements follows the same recognition pattern as the arrangements outlined above; however, the customer generally pays for the software license and maintenance in monthly or quarterly installments as opposed to an upfront software license fee. Judgment is required to determine whether these arrangements contain a significant financing component. The Company evaluates whether there is a significant difference between the amount of promised consideration over the rental term and the cash selling price of the software license, and the overall impact of the time value of money on the transaction. Rental software license arrangements that include a significant financing component are adjusted for the time value of money at the Company’s incremental borrowing rate by recording a contract asset and interest income. The Company does not adjust the promised amount of consideration for the effects of the time value of money if it is expected, at contract inception, that the period between when the Company transfers a promised solution or service to a customer and when the customer pays for that solution or service will be one year or less.
Professional Services Revenue
Professional services revenue is comprised of implementation, conversion, and programming services associated with the Company’s data processing and application management agreements, implementation or installation services related to licensed software, and other consulting services. A significant portion of our professional services revenue is derived from contracts for dedicated personnel resources who are often working full-time at a client site and under the client's direction. This revenue
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
generally re-occurs as contracts are renewed. Payment terms for professional services may be based on an upfront fixed fee, fixed upon the achievementPursuant to ASC 805, unaudited supplemental pro forma results of milestones, or on a time and materials basis.
In assessing whether implementation services provided on data processing, application management or software agreements are a distinct performance obligation, the Company considers whether the services are both capable of being distinct (i.e., can the customer benefit from the services alone or in combination with other resources that are readily available to the customer) and distinct within the context of the contract (i.e., separately identifiable from the other performance obligations in the contract). Implementation services and other professional services are typically considered distinct performance obligations. However, when these services involve significant customization or modification of an underlying solution or offering, or if the services are complex and not available from a third-party provider and must be completed prior to a customer having the ability to benefit from a solution or offering, then such services and the underlying solution or offering will be accounted for as a combined performance obligation.
The Company’s professional services that are accounted for as distinct performance obligations and that are billed on a fixed fee basis are typically satisfied as services are rendered; thus the Company uses a cost-based input method, such as cost-to-cost or efforts expended (labor hours), to provide a faithful depiction of the transfer of those services. For professional services that are distinct and billed on a time and materials basis, revenue is generally recognized using an output method that corresponds with the time and materials billed and delivered, which is reflective of the transfer of the services to the customer. Professional services that are not distinct from an associated solution or offering are recognized over the common measure of progress for the overall performance obligation (typically a time-elapsed output measure that corresponds to the period over which the solution or offering is made available to the customer).
Hardware and Other Revenue
Hardware and other miscellaneous revenue is generally recognized at a point in time upon delivery. The Company typically does not stock in inventory the hardware solutions sold but arranges for delivery of hardware from third-party suppliers. The Company determines whether hardware delivered from third-party suppliers should be recognized on a gross or net basis by evaluating whether the Company has control of the solution or service prior to it being transferred to the customer.
Material Rights
Some of the Company’s contracts with customers include options for the customer to acquire additional solutions or services in the future, including options to renew existing services. Options may represent a material right to acquire solutions or services if the discount is incremental to the range of discounts typically given for those solutions or services to that class of customer in that geographical area or market, and the customer would not have obtained the option without entering into the contract. If deemed to be a material right, the Company will account for the material right as a separate performance obligation and determine the standalone selling price based on directly observable prices when available. If the standalone selling price is not directly observable, then the Company estimates the standalone selling price to be equal to the discount that the customer would obtain by exercising the option, as adjusted for any discount that the customer would receive without exercising the option and for the likelihood that the option will be exercised.
(b) Deferred Contract Costs
The Company incurs costs as a result of both the origination and fulfillment of our contracts with customers. Origination costs relate primarily to the payment of sales commissions that are directly related to sales transactions. Fulfillment costs include the cost of implementation services related to SaaS and other cloud-based arrangements when the implementation service is not distinct from the ongoing service. When origination costs and fulfillment costs that will be used to satisfy future performance obligations are directly related to the execution of our contracts with customers, and the costs are recoverable under the contract, the costs are capitalized as a deferred contract cost.
Origination costs for contracts that contain a distinct software license recognized at a point in time are allocated between the license and all other performance obligations of the contract and amortized according to the pattern of performance for the respective obligations. Otherwise, origination costs are capitalized as a single asset for each contract and amortized using an appropriate single measure of performance considering all of the performance obligations in the contract. The Company amortizes origination costs over the expected benefit period to which the deferred contract cost relates. Origination costs related to initial contracts with a customer are amortized over the lesser of the useful life of the solution or the expected
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
customer relationship period. Commissions paid on renewals are amortized over the renewal period. Capitalized fulfillment costs are amortized over the lesser of the useful life of the solution or the expected customer relationship period.
(3) Changes in Accounting Policies
The Company adopted Topic 606, Revenue from Contracts with Customers, with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition. The details of the significant changes and quantitative impact of the changes are disclosed below.
The Company applied Topic 606 retrospectively using certain practical expedients in paragraph 606-10-65-1(f). For completed contracts that have variable consideration, the Company used the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. Further, the Company did not disclose the amount of consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for the 2017 interim reporting periods presented before the date of the initial application. Lastly, the Company did not retrospectively restate contracts modified before the beginning of the earliest reporting period presented but reflects the aggregate effect of all modifications that occurred before the beginning of the earliest period presented.
Principal vs. Agent Considerations
In customer transactions that also involve third parties, the Company determines whether it is responsible for providing the ultimate solution or service as a principal, or whether it is merely arranging for the solution or service to be provided by the third party as an agent. When the Company is acting as a principal in a transaction, the Company recognizes the gross amounts billed as revenue. When the Company is acting as an agent in a transaction, the Company recognizes the net amount retained as revenue. Previously, the Company followed the guidance of Topic 605, which lists eight specific indicators that are determinative in evaluating whether a contract is recorded on a gross or a net basis. Under Topic 606, the determination is based on whether an entity obtains control of goods or services prior to transfer to a customer. The Company determined interchange and third-party network fees associated with certain parts of the payment processing business were significantly impacted by the adoption of Topic 606. Previously, gross accounting applied to certain types of these transactions, depending on the specific facts and circumstances. However, under Topic 606 revenue from these arrangements will be presented on a net basis because the Company has concluded that it is acting as an agent in the transaction.
Software License Rentals
The Company previously recognized revenue for initial license fees only when a contract existed, the fee was fixed or determinable, software delivery had occurred, collection was deemed probable, and vendor specific objective evidence of fair value had been established for any undelivered elements in the arrangement. If those criteria were not met, the initial license revenue was either deferred or recognized over time depending on the specific facts and circumstances. Software license rentals typically include payments that are delayed for a period of time, causing the Company to conclude that some portion of the license fee was not fixed or determinable. In these arrangements, license revenue would be deferred until payments become due and payable. Under Topic 606, the Company’s software licenses are generally considered distinct performance obligations, and revenue allocated to the software license is typically recognized at a point in time upon delivery of the license. Software license revenue is also typically recognized at a point in time upon delivery of the license under Topic 606 even if it is sold in a rental model or with extended payment terms, provided collectability is probable. Accordingly, a larger portion of software license revenue is recognized upfront for such transactions under Topic 606 than under Topic 605.
Term License Early Renewals
The Company previously recognized revenue for term software license renewals upon execution of a license renewal contract, provided all other revenue recognition requirements were met. Under Topic 606, revenue attributable to software term license renewals is now recognized at a later date than it would have been recognized under the previous accounting policy.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Impacts on Financial Statements
The following tables summarize the impacts of Topic 606 adoption on the Company’s Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Balance Sheet (Unaudited) as of December 31, 2017 (in millions):
|
| | | | | | | | | | | |
| | As Previously | | | | |
| | Reported | | Adjustments | | As Adjusted |
| ASSETS | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 665 |
| | $ | — |
| | $ | 665 |
|
| Settlement deposits | 677 |
| | — |
| | 677 |
|
| Trade receivables, net | 1,650 |
| | (26 | ) | | 1,624 |
|
| Contract assets | — |
| | 108 |
| | 108 |
|
| Settlement receivables | 291 |
| | — |
| | 291 |
|
| Other receivables | 70 |
| | — |
| | 70 |
|
| Prepaid expenses and other current assets | 253 |
| | — |
| | 253 |
|
| Total current assets | 3,606 |
| | 82 |
| | 3,688 |
|
| Property and equipment, net | 610 |
| | — |
| | 610 |
|
| Goodwill | 13,730 |
| | — |
| | 13,730 |
|
| Intangible assets, net | 3,950 |
| | (65 | ) | | 3,885 |
|
| Computer software, net | 1,728 |
| | — |
| | 1,728 |
|
| Deferred contract costs, net | 362 |
| | (8 | ) | | 354 |
|
| Other noncurrent assets | 531 |
| | — |
| | 531 |
|
| Total assets | $ | 24,517 |
| | $ | 9 |
| | $ | 24,526 |
|
| LIABILITIES AND EQUITY | | | | | |
| Current liabilities: | | | | | |
| Accounts payable and accrued liabilities | $ | 1,241 |
| | $ | — |
| | $ | 1,241 |
|
| Settlement payables | 949 |
| | — |
| | 949 |
|
| Deferred revenue | 688 |
| | 88 |
| | 776 |
|
| Current portion of long-term debt | 1,045 |
| | — |
| | 1,045 |
|
| Total current liabilities | 3,923 |
| | 88 |
| | 4,011 |
|
| Long-term debt, excluding current portion | 7,718 |
| | — |
| | 7,718 |
|
| Deferred income taxes | 1,508 |
| | (40 | ) | | 1,468 |
|
| Deferred revenue | 21 |
| | 85 |
| | 106 |
|
| Other long-term liabilities | 403 |
| | — |
| | 403 |
|
| Total liabilities | 13,573 |
| | 133 |
| | 13,706 |
|
| Equity: | | | | | |
| FIS stockholders’ equity: | | | | | |
| Preferred stock | — |
| | — |
| | — |
|
| Common stock | 4 |
| | — |
| | 4 |
|
| Additional paid in capital | 10,534 |
| | — |
| | 10,534 |
|
| Retained earnings | 4,233 |
| | (124 | ) | | 4,109 |
|
| Accumulated other comprehensive earnings | (332 | ) | | — |
| | (332 | ) |
| Treasury stock, at cost | (3,604 | ) | | — |
| | (3,604 | ) |
| Total FIS stockholders’ equity | 10,835 |
| | (124 | ) | | 10,711 |
|
| Noncontrolling interest | 109 |
| | — |
| | 109 |
|
| Total equity | 10,944 |
| | (124 | ) | | 10,820 |
|
| Total liabilities and equity | $ | 24,517 |
| | $ | 9 |
| | $ | 24,526 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statement of Earnings (Unaudited)operations for the three months ended September 30, 2017 (in millions):
|
| | | | | | | | | | | |
| | As previously | | | | |
| | Reported | | Adjustments | | As Adjusted |
| Revenue | $ | 2,198 |
| | $ | (102 | ) | | $ | 2,096 |
|
| Cost of revenue | 1,483 |
| | (97 | ) | | 1,386 |
|
| Gross profit | 715 |
| | (5 | ) | | 710 |
|
| Selling, general, and administrative expenses | 327 |
| | (2 | ) | | 325 |
|
| Operating income | 388 |
| | (3 | ) | | 385 |
|
| Other income (expense): | | | | | |
| Interest income (expense), net | (84 | ) | | — |
| | (84 | ) |
| Other income (expense), net | (182 | ) | | — |
| | (182 | ) |
| Total other income (expense), net | (266 | ) | | — |
| | (266 | ) |
| Earnings before income taxes and equity method investment earnings (loss) | 122 |
| | (3 | ) | | 119 |
|
| Provision (benefit) for income taxes | 51 |
| | (1 | ) | | 50 |
|
| Equity method investment earnings (loss) | — |
| | — |
| | — |
|
| Net earnings | 71 |
| | (2 | ) | | 69 |
|
| Net (earnings) loss attributable to noncontrolling interest | (10 | ) | | — |
| | (10 | ) |
| Net earnings attributable to FIS common stockholders | $ | 61 |
| | $ | (2 | ) | | $ | 59 |
|
| | | | | | |
| Net earnings per share — basic attributable to FIS common stockholders | $ | 0.18 |
| | $ | (0.01 | ) | | $ | 0.18 |
|
| Weighted average shares outstanding — basic | 331 |
| | 331 |
| | 331 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.18 |
| | $ | (0.01 | ) | | $ | 0.18 |
|
| Weighted average shares outstanding — diluted | 336 |
| | 336 |
| | 336 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statement of Earnings (Unaudited) for theand nine months ended September 30, 20172019 and 2018, assuming the acquisition had occurred as of January 1, 2018, are presented below (in millions)millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Revenue | $ | 3,154 |
| | $ | 3,109 |
| | $ | 9,380 |
| | $ | 9,149 |
|
| Net earnings (loss) attributable to FIS common stockholders | $ | 220 |
| | $ | 14 |
| | $ | 370 |
| | $ | (225 | ) |
| Net earnings (loss) per share — basic attributable to FIS common stockholders | $ | 0.36 |
| | $ | 0.02 |
| | $ | 0.60 |
| | $ | (0.36 | ) |
| Net earnings (loss) per share — diluted attributable to FIS common stockholders | $ | 0.36 |
| | $ | 0.02 |
| | $ | 0.60 |
| | $ | (0.36 | ) |
|
| | | | | | | | | | | |
| | As previously | | | | |
| | Reported | | Adjustments | | As Adjusted |
| Revenue | $ | 6,794 |
| | $ | (292 | ) | | $ | 6,502 |
|
| Cost of revenue | 4,677 |
| | (280 | ) | | 4,397 |
|
| Gross profit | 2,117 |
| | (12 | ) | | 2,105 |
|
| Selling, general, and administrative expenses | 1,110 |
| | (6 | ) | | 1,104 |
|
| Operating income | 1,007 |
| | (6 | ) | | 1,001 |
|
| Other income (expense): | | | | | |
| Interest income (expense), net | (267 | ) | | — |
| | (267 | ) |
| Other income (expense), net | (123 | ) | | — |
| | (123 | ) |
| Total other income (expense), net | (390 | ) | | — |
| | (390 | ) |
| Earnings before income taxes and equity method investment earnings (loss) | 617 |
| | (6 | ) | | 611 |
|
| Provision (benefit) for income taxes | 262 |
| | (2 | ) | | 260 |
|
| Equity method investment earnings (loss) | — |
| | — |
| | — |
|
| Net earnings | 355 |
| | (4 | ) | | 351 |
|
| Net (earnings) loss attributable to noncontrolling interest | (24 | ) | | — |
| | (24 | ) |
| Net earnings attributable to FIS common stockholders | $ | 331 |
| | $ | (4 | ) | | $ | 327 |
|
| | | | | | |
| Net earnings per share — basic attributable to FIS common stockholders | $ | 1.00 |
| | $ | (0.01 | ) | | $ | 0.99 |
|
| Weighted average shares outstanding — basic | 330 |
| | 330 |
| | 330 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.99 |
| | $ | (0.01 | ) | | $ | 0.98 |
|
| Weighted average shares outstanding — diluted | 335 |
| | 335 |
| | 335 |
|
The unaudited pro forma results include certain pro forma adjustments to revenue and net earnings that were directly attributable to the acquisition, assuming the acquisition had occurred on January 1, 2018, including the following:
additional amortization expense that would have been recognized relating to the acquired intangible assets;
14
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statement of Comprehensive Earnings (Unaudited)a reduction in expenses for the three months ended September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As Previously | | | | |
| | Reported | | Adjustments | | As Adjusted |
| Net earnings | | | $ | 71 |
| | | | $ | (2 | ) | | | | $ | 69 |
|
| Other comprehensive earnings, before tax: | | | | | | | | | | | |
| Unrealized gain (loss) on investments and derivatives | $ | 5 |
| | | | $ | — |
| | | | $ | 5 |
| | |
| Reclassification adjustment for gain (loss) included in net earnings | — |
| | | | — |
| | | | — |
| | |
| Unrealized gain (loss) on investments and derivatives, net | 5 |
| | | | — |
| | | | 5 |
| | |
| Foreign currency translation adjustments | 46 |
| | | | — |
| | | | 46 |
| | |
| Minimum pension liability adjustments | — |
| | | | — |
| | | | — |
| | |
| Other comprehensive earnings (loss), before tax | 51 |
| | | | — |
| | | | 51 |
| | |
| Provision for income tax expense (benefit) related to items of other comprehensive earnings | 2 |
| | | | — |
| | | | 2 |
| | |
| Other comprehensive earnings (loss), net of tax | $ | 49 |
| | 49 |
| | $ | — |
| | — |
| | $ | 49 |
| | 49 |
|
| Comprehensive earnings: | | | 120 |
| | | | (2 | ) | | | | 118 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | (10 | ) | | | | — |
| | | | (10 | ) |
| Other comprehensive (earnings) loss attributable to noncontrolling interest | | | (4 | ) | | | | — |
| | | | (4 | ) |
| Comprehensive earnings attributable to FIS common stockholders | | | $ | 106 |
| | | | $ | (2 | ) | | | | $ | 104 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statement of Comprehensive Earnings (Unaudited) for theand nine months ended September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As Previously | | | | |
| | Reported | | Adjustments | | As Adjusted |
| Net earnings | | | $ | 355 |
| | | | $ | (4 | ) | | | | $ | 351 |
|
| Other comprehensive earnings, before tax: | | | | | | | | | | | |
| Unrealized gain (loss) on investments and derivatives | $ | (28 | ) | | | | $ | — |
| | | | $ | (28 | ) | | |
| Reclassification adjustment for gain (loss) included in net earnings | — |
| | | | — |
| | | | — |
| | |
| Unrealized gain (loss) on investments and derivatives, net | (28 | ) | | | | — |
| | | | (28 | ) | | |
| Foreign currency translation adjustments | 20 |
| | | | — |
| | | | 20 |
| | |
| Minimum pension liability adjustments | (10 | ) | | | | — |
| | | | (10 | ) | | |
| Other comprehensive earnings (loss), before tax | (18 | ) | | | | — |
| | | | (18 | ) | | |
| Provision for income tax expense (benefit) related to items of other comprehensive earnings | (11 | ) | | | | — |
| | | | (11 | ) | | |
| Other comprehensive earnings (loss), net of tax | $ | (7 | ) | | (7 | ) | | $ | — |
| | — |
| | $ | (7 | ) | | (7 | ) |
| Comprehensive earnings: | | | 348 |
| | | | (4 | ) | | | | 344 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | (24 | ) | | | | — |
| | | | (24 | ) |
| Other comprehensive (earnings) loss attributable to noncontrolling interest | | | (2 | ) | | | | — |
| | | | (2 | ) |
| Comprehensive earnings attributable to FIS common stockholders | | | $ | 322 |
| | | | $ | (4 | ) | | | | $ | 318 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Statement of Cash Flows (Unaudited)$149 million and $210 million, respectively, and an increase in expenses for the three and nine months ended September 30, 2017 (in millions):2018 of $8 million and $267 million, respectively, for acquisition-related transaction costs and other one-time non-recurring costs.
|
| | | | | | | | | | | |
| | As Previously | | | | |
| | Reported | | Adjustments | | As Adjusted |
| Cash flows from operating activities: | | | | | |
| Net earnings | $ | 355 |
| | $ | (4 | ) | | $ | 351 |
|
| Adjustment to reconcile net earnings to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 1,033 |
| | (18 | ) | | 1,015 |
|
| Amortization of debt issue costs | 15 |
| | — |
| | 15 |
|
| Gain on sale of assets | (55 | ) | | — |
| | (55 | ) |
| Loss on extinguishment of debt | 192 |
| | — |
| | 192 |
|
| Stock-based compensation | 86 |
| | — |
| | 86 |
|
| Deferred income taxes | (197 | ) | | 1 |
| | (196 | ) |
| Net changes in assets and liabilities, net of effects from acquisitions and foreign currency: | | | | | |
| Trade receivables | (105 | ) | | (82 | ) | | (187 | ) |
| Contract assets | — |
| | 77 |
| | 77 |
|
| Settlement activity | (27 | ) | | — |
| | (27 | ) |
| Prepaid expenses and other assets | (20 | ) | | — |
| | (20 | ) |
| Deferred contract costs | (121 | ) | | 10 |
| | (111 | ) |
| Deferred revenue | (70 | ) | | 19 |
| | (51 | ) |
| Accounts payable, accrued liabilities, and other liabilities | (7 | ) | | (3 | ) | | (10 | ) |
| Net cash provided by operating activities | 1,079 |
| | — |
| | 1,079 |
|
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Additions to property and equipment | (98 | ) | | — |
| | (98 | ) |
| Additions to computer software | (350 | ) | | — |
| | (350 | ) |
| Net proceeds from sale of assets | 1,307 |
| | — |
| | 1,307 |
|
| Other investing activities, net | (3 | ) | | — |
| | (3 | ) |
| Net cash provided by (used in) investing activities | 856 |
| | — |
| | 856 |
|
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Borrowings | 7,900 |
| | — |
| | 7,900 |
|
| Repayment of borrowings and capital lease obligations | (9,594 | ) | | — |
| | (9,594 | ) |
| Debt issuance costs | (13 | ) | | — |
| | (13 | ) |
| Proceeds from exercise of stock options | 168 |
| | — |
| | 168 |
|
| Treasury stock activity | (46 | ) | | — |
| | (46 | ) |
| Dividends paid | (289 | ) | | — |
| | (289 | ) |
| Distribution to Brazilian Venture partner | (23 | ) | | — |
| | (23 | ) |
| Other financing activities, net | (36 | ) | | — |
| | (36 | ) |
| Net cash provided by (used in) financing activities | (1,933 | ) | | — |
| | (1,933 | ) |
| Effect of foreign currency exchange rate changes on cash | 35 |
| | — |
| | 35 |
|
| Net increase (decrease) in cash and cash equivalents | 37 |
| | — |
| | 37 |
|
| Cash and cash equivalents, beginning of year | 683 |
| | — |
| | 683 |
|
| Cash and cash equivalents, end of year | $ | 720 |
| | $ | — |
| | $ | 720 |
|
| | | | | | |
| Supplemental cash flow information: | | | | | |
| Cash paid for interest | $ | 266 |
| | $ | — |
| | $ | 266 |
|
| Cash paid for income taxes | $ | 485 |
| | $ | — |
| | $ | 485 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4) Revenue
Disaggregation of Revenue
In the following tables, revenue is disaggregated by primary geographical market, type of revenue, and recurring nature of revenue recognized. The tables also include a reconciliation of the disaggregated revenue with the Company’s reportable segments. Prior-period amounts have been reclassified to conform to the new reportable segment presentation as discussed in Note 13.
For the three months ended September 30, 2018 (in millions):
|
| | | | | | | | | | | | | | | | |
| | | Reportable Segments |
| | | | | | | Corporate | | |
| | | IFS | | GFS | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | |
| North America | | $ | 1,046 |
| | $ | 456 |
| | $ | 66 |
| | $ | 1,568 |
|
| All others | | 44 |
| | 460 |
| | 12 |
| | 516 |
|
| Total | | $ | 1,090 |
| | $ | 916 |
| | $ | 78 |
| | $ | 2,084 |
|
| | | | | | | | | |
| Type of Revenue: | | | | | | | | |
| Processing and services | | $ | 879 |
| | $ | 509 |
| | $ | 69 |
| | $ | 1,457 |
|
| License and software related | | 92 |
| | 255 |
| | — |
| | 347 |
|
| Professional services | | 40 |
| | 151 |
| | 2 |
| | 193 |
|
| Hardware and other | | 79 |
| | 1 |
| | 7 |
| | 87 |
|
| Total | | $ | 1,090 |
| | $ | 916 |
| | $ | 78 |
| | $ | 2,084 |
|
| | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | |
| Recurring fees | | $ | 959 |
| | $ | 663 |
| | $ | 69 |
| | $ | 1,691 |
|
| Non-recurring fees | | 131 |
| | 253 |
| | 9 |
| | 393 |
|
| Total | | $ | 1,090 |
| | $ | 916 |
| | $ | 78 |
| | $ | 2,084 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three months ended September 30, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Reportable Segments |
| | | | | | | Capital | | | | |
| | | Merchant | | Banking | | Market | | Corporate | | |
| | | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | | | |
| North America | | $ | 501 |
| | $ | 1,264 |
| | $ | 378 |
| | $ | — |
| | $ | 2,143 |
|
| All others | | 219 |
| | 227 |
| | 233 |
| | — |
| | 679 |
|
| Total | | $ | 720 |
| | $ | 1,491 |
| | $ | 611 |
| | $ | — |
| | $ | 2,822 |
|
| | | | | | | | | | | |
| Type of Revenue: | | | | | | | | | | |
| Processing and services | | $ | 704 |
| | $ | 1,138 |
| | $ | 292 |
| | $ | — |
| | $ | 2,134 |
|
| License and software related | | 1 |
| | 153 |
| | 223 |
| | — |
| | 377 |
|
| Professional services | | — |
| | 112 |
| | 95 |
| | — |
| | 207 |
|
| Hardware and other | | 15 |
| | 88 |
| | 1 |
| | — |
| | 104 |
|
| Total | | $ | 720 |
| | $ | 1,491 |
| | $ | 611 |
| | $ | — |
| | $ | 2,822 |
|
| | | | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | | | |
| Recurring fees | | $ | 717 |
| | $ | 1,244 |
| | $ | 426 |
| | $ | — |
| | $ | 2,387 |
|
| Non-recurring fees | | 3 |
| | 247 |
| | 185 |
| | — |
| | 435 |
|
| Total | | $ | 720 |
| | $ | 1,491 |
| | $ | 611 |
| | $ | — |
| | $ | 2,822 |
|
For the nine months ended September 30, 20182019 (in millions):
| | | | | | | | | | | | | | | | | | | | Reportable Segments |
| | | Reportable Segments | | | | | | Capital | | | | |
| | | | | | | Corporate | | | | Merchant | | Banking | | Market | | Corporate | | |
| | | IFS | | GFS | | and Other | | Total | | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | | | | | | | | | | | |
| North America | | $ | 3,143 |
| | $ | 1,343 |
| | $ | 201 |
| | $ | 4,687 |
| | $ | 647 |
| | $ | 3,616 |
| | $ | 1,112 |
| | $ | — |
| | $ | 5,375 |
|
| All others | | 132 |
| | 1,399 |
| | 38 |
| | 1,569 |
| | 249 |
| | 701 |
| | 666 |
| | — |
| | 1,616 |
|
| Total | | $ | 3,275 |
| | $ | 2,742 |
| | $ | 239 |
| | $ | 6,256 |
| | $ | 896 |
| | $ | 4,317 |
| | $ | 1,778 |
| | $ | — |
| | $ | 6,991 |
|
| | | | | | | | | | | | | | | | | | | |
| Type of Revenue: | | | | | | | | | | | | | | | | | | |
| Processing and services | | $ | 2,711 |
| | $ | 1,566 |
| | $ | 217 |
| | $ | 4,494 |
| | $ | 866 |
| | $ | 3,314 |
| | $ | 864 |
| | $ | — |
| | $ | 5,044 |
|
| License and software related | | 269 |
| | 730 |
| | 1 |
| | 1,000 |
| | 8 |
| | 410 |
| | 635 |
| | — |
| | 1,053 |
|
| Professional services | | 120 |
| | 438 |
| | 6 |
| | 564 |
| | — |
| | 328 |
| | 274 |
| | — |
| | 602 |
|
| Hardware and other | | 175 |
| | 8 |
| | 15 |
| | 198 |
| | 22 |
| | 265 |
| | 5 |
| | — |
| | 292 |
|
| Total | | $ | 3,275 |
| | $ | 2,742 |
| | $ | 239 |
| | $ | 6,256 |
| | $ | 896 |
| | $ | 4,317 |
| | $ | 1,778 |
| | $ | — |
| | $ | 6,991 |
|
| | | | | | | | | | | | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | | | | | | | | | | | |
| Recurring fees | | $ | 2,901 |
| | $ | 2,042 |
| | $ | 218 |
| | $ | 5,161 |
| | $ | 885 |
| | $ | 3,610 |
| | $ | 1,266 |
| | $ | — |
| | $ | 5,761 |
|
| Non-recurring fees | | 374 |
| | 700 |
| | 21 |
| | 1,095 |
| | 11 |
| | 707 |
| | 512 |
| | — |
| | 1,230 |
|
| Total | | $ | 3,275 |
| | $ | 2,742 |
| | $ | 239 |
| | $ | 6,256 |
| | $ | 896 |
| | $ | 4,317 |
| | $ | 1,778 |
| | $ | — |
| | $ | 6,991 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three months ended September 30, 20172018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Reportable Segments |
| | | | | | | Capital | | | | |
| | | Merchant | | Banking | | Market | | Corporate | | |
| | | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | | | |
| North America | | $ | 34 |
| | $ | 1,152 |
| | $ | 370 |
| | $ | 12 |
| | $ | 1,568 |
|
| All others | | 16 |
| | 281 |
| | 219 |
| | — |
| | 516 |
|
| Total | | $ | 50 |
| | $ | 1,433 |
| | $ | 589 |
| | $ | 12 |
| | $ | 2,084 |
|
| | | | | | | | | | | |
| Type of Revenue: | | | | | | | | | | |
| Processing and services | | $ | 47 |
| | $ | 1,124 |
| | $ | 274 |
| | $ | 12 |
| | $ | 1,457 |
|
| License and software related | | — |
| | 127 |
| | 220 |
| | — |
| | 347 |
|
| Professional services | | — |
| | 99 |
| | 94 |
| | — |
| | 193 |
|
| Hardware and other | | 3 |
| | 83 |
| | 1 |
| | — |
| | 87 |
|
| Total | | $ | 50 |
| | $ | 1,433 |
| | $ | 589 |
| | $ | 12 |
| | $ | 2,084 |
|
| | | | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | | | |
| Recurring fees | | $ | 49 |
| | $ | 1,221 |
| | $ | 409 |
| | $ | 12 |
| | $ | 1,691 |
|
| Non-recurring fees | | 1 |
| | 212 |
| | 180 |
| | — |
| | 393 |
|
| Total | | $ | 50 |
| | $ | 1,433 |
| | $ | 589 |
| | $ | 12 |
| | $ | 2,084 |
|
For the nine months ended September 30, 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Reportable Segments |
| | | | | | | Capital | | | | |
| | | Merchant | | Banking | | Market | | Corporate | | |
| | | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | | | |
| North America | | $ | 157 |
| | $ | 3,379 |
| | $ | 1,108 |
| | $ | 43 |
| | $ | 4,687 |
|
| All others | | 48 |
| | 859 |
| | 662 |
| | — |
| | 1,569 |
|
| Total | | $ | 205 |
| | $ | 4,238 |
| | $ | 1,770 |
| | $ | 43 |
| | $ | 6,256 |
|
| | | | | | | | | | | |
| Type of Revenue: | | | | | | | | | | |
| Processing and services | | $ | 195 |
| | $ | 3,399 |
| | $ | 857 |
| | $ | 43 |
| | $ | 4,494 |
|
| License and software related | | 2 |
| | 360 |
| | 638 |
| | — |
| | 1,000 |
|
| Professional services | | — |
| | 292 |
| | 272 |
| | — |
| | 564 |
|
| Hardware and other | | 8 |
| | 187 |
| | 3 |
| | — |
| | 198 |
|
| Total | | $ | 205 |
| | $ | 4,238 |
| | $ | 1,770 |
| | $ | 43 |
| | $ | 6,256 |
|
| | | | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | | | |
| Recurring fees | | $ | 202 |
| | $ | 3,653 |
| | $ | 1,263 |
| | $ | 43 |
| | $ | 5,161 |
|
| Non-recurring fees | | 3 |
| | 585 |
| | 507 |
| | — |
| | 1,095 |
|
| Total | | $ | 205 |
| | $ | 4,238 |
| | $ | 1,770 |
| | $ | 43 |
| | $ | 6,256 |
|
|
| | | | | | | | | | | | | | | | |
| | | Reportable Segments |
| | | As Adjusted |
| | | | | | | Corporate | | |
| | | IFS | | GFS | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | |
| North America | | $ | 997 |
| | $ | 464 |
| | $ | 70 |
| | $ | 1,531 |
|
| All others | | 41 |
| | 511 |
| | 13 |
| | 565 |
|
| Total | | $ | 1,038 |
| | $ | 975 |
| | $ | 83 |
| | $ | 2,096 |
|
| | | | | | | | | |
| Type of Revenue: | | | | | | | | |
| Processing and services | | $ | 852 |
| | $ | 545 |
| | $ | 76 |
| | $ | 1,473 |
|
| License and software related | | 94 |
| | 232 |
| | 1 |
| | 327 |
|
| Professional services | | 41 |
| | 197 |
| | 2 |
| | 240 |
|
| Hardware and other | | 51 |
| | 1 |
| | 4 |
| | 56 |
|
| Total | | $ | 1,038 |
| | $ | 975 |
| | $ | 83 |
| | $ | 2,096 |
|
| | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | |
| Recurring fees | | $ | 911 |
| | $ | 703 |
| | $ | 77 |
| | $ | 1,691 |
|
| Non-recurring fees | | 127 |
| | 272 |
| | 6 |
| | 405 |
|
| Total | | $ | 1,038 |
| | $ | 975 |
| | $ | 83 |
| | $ | 2,096 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the nine months ended September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | | |
| | | Reportable Segments |
| | | As Adjusted |
| | | | | | | Corporate | | |
| | | IFS | | GFS | | and Other | | Total |
| Primary Geographical Markets: | | | | | | | | |
| North America | | $ | 3,044 |
| | $ | 1,473 |
| | $ | 238 |
| | $ | 4,755 |
|
| All others | | 118 |
| | 1,591 |
| | 38 |
| | 1,747 |
|
| Total | | $ | 3,162 |
| | $ | 3,064 |
| | $ | 276 |
| | $ | 6,502 |
|
| | | | | | | | | |
| Type of Revenue: | | | | | | | | |
| Processing and services | | $ | 2,586 |
| | $ | 1,645 |
| | $ | 243 |
| | $ | 4,474 |
|
| License and software related | | 289 |
| | 680 |
| | 14 |
| | 983 |
|
| Professional services | | 146 |
| | 733 |
| | 10 |
| | 889 |
|
| Hardware and other | | 141 |
| | 6 |
| | 9 |
| | 156 |
|
| Total | | $ | 3,162 |
| | $ | 3,064 |
| | $ | 276 |
| | $ | 6,502 |
|
| | | | | | | | | |
| Recurring Nature of Revenue Recognition: | | | | | | | | |
| Recurring fees | | $ | 2,763 |
| | $ | 2,112 |
| | $ | 251 |
| | $ | 5,126 |
|
| Non-recurring fees | | 399 |
| | 952 |
| | 25 |
| | 1,376 |
|
| Total | | $ | 3,162 |
| | $ | 3,064 |
| | $ | 276 |
| | $ | 6,502 |
|
Contract Balances
The following table provides information about trade receivables, contract assets, and deferred revenue from contracts with customers (in millions).
|
| | | | | | | | |
| | | As of |
| | | September 30, | | December 31, |
| | | 2018 | | 2017 |
| | | | | As adjusted |
| | | | | |
| Trade receivables | | $ | 1,398 |
| | $ | 1,624 |
|
| Contract assets (current) | | 115 |
| | 108 |
|
| Contract assets (non-current), included in other noncurrent assets | | 96 |
| | 118 |
|
| Deferred revenue (current) | | 692 |
| | 776 |
|
| Deferred revenue (non-current) | | 61 |
| | 106 |
|
The payment terms and conditions in our customer contracts may vary. In some cases, customers pay in advance of our delivery of solutions or services; in other cases, payment is due as services are performed or in arrears following the delivery of the solutions or services. Differences in timing between revenue recognition and invoicing result in accrued trade receivables, contract assets, or deferred revenue on our Condensed Consolidated Balance Sheets (Unaudited). Receivables are accrued when revenue is recognized prior to invoicing but the right to payment is unconditional (i.e., only the passage of time is required). This occurs most commonly when software term licenses recognized at a point in time are paid for periodically over the license term. Contract assets result when amounts allocated to distinct performance obligations are recognized when or as control of a solution or service is transferred to the customer but invoicing is contingent on performance of other performance
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
obligations or on completion of contractual milestones. Contract assets are transferred to receivables when the rights become unconditional, typically upon invoicing of the related performance obligations in the contract or upon achieving the requisite project milestone. Deferred revenue results from customer payments in advance of our satisfaction of the associated performance obligation(s) and relates primarily to prepaid maintenance or other recurring services. Deferred revenue is relieved as revenue is recognized. Contract assets and deferred revenue are reported on a contract-by-contract basis at the end of each reporting period. Changes in the contract assets and deferred revenue balances during the nine months ended September 30, 2018 were not materially impacted by any factors other than those described above.
The Company recognized revenue of $178$128 million and $185$178 million during the three months and $629$636 million and $598$629 million during the nine months ended September 30, 20182019 and 2017,2018, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods.
During the three and nine months ended September 30, 2018 and 2017, amounts recognized from performance obligations satisfied (or partially satisfied) in prior periods were insignificant.
Transaction Price Allocated to the Remaining Performance Obligations
As of September 30, 2018,2019, approximately $19.5$20.0 billion of revenue is estimated to be recognized in the future from the Company’sBanking Solutions and Capital Market Solutions segments' remaining unfulfilled performance obligations, which are primarily comprised of recurring account- and volume-based processing services. This excludes the amount of anticipated recurring renewals not yet contractually obligated. The Company expects to recognize approximately 35% of ourthe Banking Solutions and Capital Market Solutions segments' remaining performance obligations over the next 12 months, approximately another 25% over the next 13 to 24 months, and the balance thereafter.
As permitted by ASC 606, Revenue from Contracts with Customers, the Company has elected to exclude from this disclosure an estimate for the Merchant Solutions segment, which is primarily comprised of contracts with an original duration of one year or less or variable consideration that meet specific criteria. This segment’s core performance obligations consist of variable consideration under a stand-ready series of distinct days of service, and revenue from the segment’s products and service arrangements are generally billed and recognized as the services are performed. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
(5) Condensed Consolidated Financial Statement Details
Cash and Cash Equivalents
As a result of the assets acquired in the Worldpay acquisition, the Company included restricted cash in the cash and cash equivalents balance reported in the Condensed Consolidated Statements of Cash Flows (Unaudited). The reconciliation between cash and cash equivalents in the Condensed Consolidated Balance Sheets (Unaudited) and the Condensed Consolidated Statements of Cash Flows (Unaudited) is as follows (in millions):
|
| | | | | | | |
| | September 30,
2019 | | December 31,
2018 |
| Cash and cash equivalents on the Condensed Consolidated Balance Sheets (Unaudited) | $ | 1,305 |
| | $ | 703 |
|
| Merchant float (in Settlement deposits and merchant float) | 2,000 |
| | — |
|
| Other restricted cash (in Other noncurrent assets) | 525 |
| | — |
|
| Total Cash and cash equivalents per the Condensed Consolidated Statements of Cash Flows (Unaudited) | $ | 3,830 |
| | $ | 703 |
|
Property and Equipment, Intangible Assets and Computer Software
The following table shows the Company’s Condensed Consolidated Financial Statement (Unaudited) details as of September 30, 20182019 and December 31, 20172018 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | Cost | | Accumulated
depreciation and amortization | | Net | | Cost | | Accumulated
depreciation and amortization | | Net |
| Property and equipment | $ | 2,026 |
| | $ | 1,215 |
| | $ | 811 |
| | $ | 1,645 |
| | $ | 1,058 |
| | $ | 587 |
|
| Intangible assets | $ | 19,855 |
| | $ | 3,772 |
| | $ | 16,083 |
| | $ | 6,122 |
| | $ | 2,990 |
| | $ | 3,132 |
|
| Computer software | $ | 4,511 |
| | $ | 1,486 |
| | $ | 3,025 |
| | $ | 3,103 |
| | $ | 1,308 |
| | $ | 1,795 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017, As adjusted |
| | Cost | | Accumulated
depreciation and amortization | | Net | | Cost | | Accumulated
depreciation and amortization | | Net |
| Property and equipment | $ | 1,686 |
| | $ | 1,140 |
| | $ | 546 |
| | $ | 1,657 |
| | $ | 1,047 |
| | $ | 610 |
|
| Intangible assets | $ | 6,279 |
| | $ | 2,975 |
| | $ | 3,304 |
| | $ | 6,369 |
| | $ | 2,484 |
| | $ | 3,885 |
|
| Computer software | $ | 3,002 |
| | $ | 1,292 |
| | $ | 1,710 |
| | $ | 2,862 |
| | $ | 1,134 |
| | $ | 1,728 |
|
The Company entered into capital lease and other financing obligations of $1$24 million and $1 million during the three months and $1$59 million and $80$1 million during the nine months ended September 30, 2019 and 2018, respectively, for certain computer hardware and 2017, respectively.software. The assets are included in property and equipment and computer software, and the remainingother financing obligations are classified as long-term debt on our Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2018 and December 31, 2017. Periodic payments are included in repayment of borrowings on the Condensed Consolidated Statements of Cash Flows (Unaudited).
Changes in goodwill during the nine months ended September 30, 2018 are summarized as follows (in millions):
|
| | | |
| | Total |
| Balance, December 31, 2017 | $ | 13,730 |
|
| Goodwill distributed through sale of business | (67 | ) |
| Brazilian Venture impairment | (25 | ) |
| Foreign currency adjustments | (53 | ) |
| Balance, September 30, 2018 | $ | 13,585 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
are classified as long-term debt on our Condensed Consolidated Balance Sheets (Unaudited). Periodic payments are included in repayment of borrowings and other financing obligations on the Condensed Consolidated Statements of Cash Flows (Unaudited).
As of September 30, 2018,2019, intangible assets, net of amortization, includes $3,236$15,606 million of customer relationships and other amortizable intangible assets, $25$435 million of finite-lived trademarks, as well as $43$42 million of non-amortizable indefinite-lived trademarks. Amortization expense with respect to these intangible assets was $162$481 million and $167$162 million for the three months and $794 million and $498 million and $502 million forduring the nine months ended September 30, 20182019 and 2017,2018, respectively.
Goodwill
Changes in goodwill during the nine months ended September 30, 2019 are summarized below (in millions). Prior-period amounts have been reclassified to conform to the new reportable segment presentation as discussed in Note 13.
|
| | | | | | | | | | | | | | | |
| | | | | | Capital | | |
| | Merchant | | Banking | | Market | | |
| | Solutions | | Solutions | | Solutions | | Total |
| Balance, December 31, 2018 | $ | 730 |
| | $ | 7,991 |
| | $ | 4,824 |
| | $ | 13,545 |
|
| Goodwill attributable to acquisition (1) | 34,951 |
| | 3,477 |
| | | | 38,428 |
|
| Foreign currency adjustments | (35 | ) | | (11 | ) | | (37 | ) | | (83 | ) |
| Balance, September 30, 2019 | $ | 35,646 |
| | $ | 11,457 |
| | $ | 4,787 |
| | $ | 51,890 |
|
| |
| (1) | The amount of goodwill attributable to the acquisition of Worldpay, including its allocation to reportable segments, is preliminary and subject to change. |
Effective August 31, 2018, FIS sold substantially all the assets of the Certegy Check Services business unit, resulting in a pre-tax loss of $54 million, including goodwill distributed through the sale of business of $43 million.
Asset Impairments
During the three months ended September 30, 2019, the Company recorded pre-tax asset impairments of $87 million, primarily related to certain computer software resulting from the Company's net realizable value analysis.
During September 2018, as a result of entering into an agreement to unwind the joint venture ("Brazilian Venture") that the Company operatesoperated with Banco Bradesco, the Company recorded pre-tax asset impairments totaling $95 million, including $42 million for the Brazilian Venture contract intangible asset, $25 million for goodwill, and $28 million for assets being held for sale that will bewere transferred to Banco Bradesco upon closing of the agreement (see Note 10)11).
Visa Europe and Contingent Value Rights
As part of the Worldpay acquisition, the Company acquired certain assets and liabilities related to the June 2016 Worldpay Group plc (Legacy Worldpay) disposal of its ownership interest in Visa Europe to Visa, Inc. In connection with the disposal, Legacy Worldpay agreed to pay former Legacy Worldpay owners 90% of the net-of-tax proceeds from the disposal, known as contingent value rights (“CVR”), pending the resolution of certain historical claims and the finalization of the proceeds from disposal. At September 30, 2019, the value of the CVR liability to the former owners was $700 million recorded in Other long-term liabilities on the Condensed Consolidated Balance Sheets (Unaudited). The related proceeds from the disposal are recorded primarily as restricted cash and as Visa, Inc. Series B preferred shares in Other noncurrent assets on the Condensed Consolidated Balance Sheet (Unaudited). The resolution of the CVR liability is expected to occur no later than June 2028, at which time the Visa, Inc. Series B preferred shares are subject to mandatory conversion into Visa, Inc. Class A Common Stock.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Settlement Activity and Merchant Float
Banking Solutions
We manage certain integrated electronic payment services and programs and wealth management processes for our clients that require us to hold and manage client cash balances used to fund their daily settlement activity. Settlement deposits represent funds we hold that were drawn from our clients to facilitate settlement activities. Settlement receivables represent amounts funded by us. Settlement payables consist of settlement deposits from clients, settlement payables to third parties or clients, and outstanding checks related to our settlement activities for which the right of offset does not exist or we do not intend to exercise our right of offset. Our accounting policy for such outstanding checks is to include them in settlement payables on the Condensed Consolidated Balance Sheets (Unaudited) and operating cash flows on the Condensed Consolidated Statements of Cash Flows (Unaudited).
(6) Deferred Contract Costs
Settlement deposits and merchant float, settlement receivables, and settlement payables represent intermediary balances arising from the settlement process which involves the transferring of funds between card issuers, merchants and Sponsoring Members. Funds are processed under two models, a sponsorship model and a direct member model. In the U.S., the Company operates under the sponsorship model, and outside the U.S., the Company operates under the direct membership model.
Origination
Under the sponsorship model, in order for the Company to provide electronic payment processing services, Visa, MasterCard and fulfillment costs from contractsother payment networks require sponsorship by a member clearing bank. The Company has an agreement with customers capitalizedvarious banks and financial institutions (the “Sponsoring Member”) to provide sponsorship services to the Company. Under the sponsorship agreements the Company is registered as of September 30, 2018a Visa Third-Party Agent and December 31, 2017 consisteda MasterCard Service Provider. The sponsorship services allow us to route transactions under the Sponsoring Members' membership to clear card transactions through MasterCard, Visa and other networks. Under this model, the standards of the following (in millions):
|
| | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| Contract costs on implementations in progress | 91 |
| | 104 |
|
| Incremental contract origination costs on completed implementations, net | 196 |
| | 127 |
|
| Contract fulfillment costs on completed implementations, net | 155 |
| | 123 |
|
| Total deferred contract costs, net | $ | 442 |
| | $ | 354 |
|
Amortizationpayment networks restrict us from performing funds settlement and as such require that these funds be in the possession of deferred contract costs on completed implementations was $30 millionthe Sponsoring Member until the merchant is funded. Accordingly, settlement receivables and $26 million duringsettlement payables resulting from the three months and $89 million and $72 million during the nine months ended September 30, 2018 and 2017, respectively, and there were no impairment losses in relationsubmission of settlement files to the costs capitalizednetwork or cash received from the network in advance of funding the network are the responsibility of the Sponsoring Member and are not recorded on the Company’s Condensed Consolidated Balance Sheets (Unaudited).
Settlement receivables and settlement payables are also recorded in the U.S. as a result of intermediary balances due to/from the Sponsoring Member. The Company receives funds from certain networks which are owed to the Sponsoring Member for settlement. In other cases the periods presented.Company transfers funds to the Sponsoring Member for settlement in advance of receiving funds from the network. These timing differences result in settlement receivables and settlement payables. The amounts are generally collected or paid the following business day. Additionally, U.S. settlement receivables and settlement payables arise related to interchange expenses, merchant reserves and exception items.
Under the direct membership model, the Company is a direct member in Visa, MasterCard and other payment networks as third party sponsorship to the networks is not required. This results in the Company performing settlement between the networks and the merchant and requires adherence to the standards of the payment networks in which the Company is a direct member. Settlement deposits and merchant float, settlement receivables and settlement payables result when the Company submits the merchant file to the network or when funds are received by the Company in advance of paying the funds to the merchant. The amounts are generally collected or paid the following business day.
Under the direct membership model, merchant float represents cash balances the Company holds on behalf of merchants when the incoming amount from the card networks precedes when the funding to merchants falls due. Merchant float funds held in segregated accounts in a fiduciary capacity are considered restricted cash.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6) Deferred Contract Costs
Origination and fulfillment costs from contracts with customers capitalized as of September 30, 2019 and December 31, 2018 consisted of the following (in millions):
|
| | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| Contract costs on implementations in progress | $ | 86 |
| | $ | 93 |
|
| Incremental contract origination costs on completed implementations, net | 332 |
| | 219 |
|
| Contract fulfillment costs on completed implementations, net | 170 |
| | 163 |
|
| Total deferred contract costs, net | $ | 588 |
| | $ | 475 |
|
Amortization of deferred contract costs on completed implementations was $48 million and $30 million during the three months and $136 million and $89 million during the nine months ended September 30, 2019 and 2018, respectively, and there were 0 significant impairment losses in relation to the costs capitalized for the periods presented.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(7) Long-Term Debt
Long-term debt as of September 30, 20182019 and December 31, 20172018, consisted of the following (in millions):
|
| | | | | | | |
| | September 30, | | December 31, |
| | 2019 | | 2018 |
| Senior Notes due October 2020, interest payable semi-annually at 3.625% ("2020 Notes") | $ | 1,150 |
| | $ | 1,150 |
|
| Senior Euro Notes due January 2021, interest payable annually at 0.400% ("2021 Euro Notes") | 546 |
| | 572 |
|
| Senior Euro Floating Rate Notes due May 2021, interest payable quarterly ("Floating Rate Notes") (1) | 546 |
| | — |
|
| Senior Euro Notes due May 2021, interest payable annually at 0.125% ("May 2021 Euro Notes") | 546 |
| | — |
|
| Senior Notes due August 2021, interest payable semi-annually at 2.250% ("2021 Notes") | 750 |
| | 750 |
|
| Senior GBP Notes due June 2022, interest payable annually at 1.700% ("2022 GBP Notes") | 369 |
| | 382 |
|
| Senior Notes due October 2022, interest payable semi-annually at 4.500% ("2022 Notes") | 300 |
| | 300 |
|
| Senior Notes due April 2023, interest payable semi-annually at 3.500% ("2023 Notes") | 700 |
| | 700 |
|
| Senior Euro Notes due May 2023, interest payable annually at 0.750% ("2023 Euro Notes") | 1,365 |
| | — |
|
| Senior Notes due June 2024, interest payable semi-annually at 3.875% ("2024 Notes") | 400 |
| | 400 |
|
| Senior Euro Notes due July 2024, interest payable annually at 1.100% ("2024 Euro Notes") | 546 |
| | 572 |
|
| Senior GBP Notes due May 2025, interest payable annually at 2.602% ("2025 GBP Notes") | 769 |
| | — |
|
| Senior Notes due October 2025, interest payable semi-annually at 5.000% ("2025 Notes") | 900 |
| | 900 |
|
| Senior Notes due August 2026, interest payable semi-annually at 3.000% ("2026 Notes") | 1,250 |
| | 1,250 |
|
| Senior Euro Notes due May 2027, interest payable annually at 1.500% ("2027 Euro Notes") | 1,365 |
| | — |
|
| Senior Notes due May 2028, interest payable semi-annually at 4.250% ("2028 Notes") | 400 |
| | 400 |
|
| Senior Notes due May 2029, interest payable semi-annually at 3.750% ("2029 Notes") | 1,000 |
| | — |
|
| Senior Euro Notes due May 2030, interest payable annually at 2.000% ("2030 Euro Notes") | 1,092 |
| | — |
|
| Senior GBP Notes due May 2031, interest payable annually at 3.360% ("2031 GBP Notes") | 769 |
| | — |
|
| Senior Euro Notes due May 2039, interest payable annually at 2.950% ("2039 Euro Notes") | 546 |
| | — |
|
| Senior Notes due August 2046, interest payable semi-annually at 4.500% ("2046 Notes") | 500 |
| | 500 |
|
| Senior Notes due May 2048, interest payable semi-annually at 4.750% ("2048 Notes") | 600 |
| | 600 |
|
| Revolving Credit Facility (2) | 560 |
| | 208 |
|
| Other | 55 |
| | 34 |
|
| | 17,024 |
| | 8,718 |
|
| Current portion of long-term debt | (79 | ) | | (48 | ) |
| Long-term debt, excluding current portion | $ | 16,945 |
| | $ | 8,670 |
|
|
| | | | | | | |
| | September 30, | | December 31, |
| | 2018 | | 2017 |
| Senior Notes due April 2018, interest payable semi-annually at 2.000% (1) | — |
| | 250 |
|
| Senior Notes due October 2018, interest payable semi-annually at 2.850% | — |
| | 750 |
|
| Senior Notes due October 2020, interest payable semi-annually at 3.625% ("2020 Notes") | 1,150 |
| | 1,150 |
|
| Senior Euro Notes due January 2021, interest payable annually at 0.400% ("2021 Euro Notes") | 580 |
| | 599 |
|
| Senior Notes due August 2021, interest payable semi-annually at 2.250% ("2021 Notes") | 750 |
| | 750 |
|
| Senior GBP Notes due June 2022, interest payable annually at 1.700% ("2022 GBP Notes") | 391 |
| | 405 |
|
| Senior Notes due October 2022, interest payable semi-annually at 4.500% ("2022 Notes") | 300 |
| | 300 |
|
| Senior Notes due April 2023, interest payable semi-annually at 3.500% ("2023 Notes") | 700 |
| | 700 |
|
| Senior Notes due June 2024, interest payable semi-annually at 3.875% ("2024 Notes") | 400 |
| | 400 |
|
| Senior Euro Notes due July 2024, interest payable annually at 1.100% ("2024 Euro Notes") | 580 |
| | 599 |
|
| Senior Notes due October 2025, interest payable semi-annually at 5.000% ("2025 Notes") | 900 |
| | 900 |
|
| Senior Notes due August 2026, interest payable semi-annually at 3.000% ("2026 Notes") | 1,250 |
| | 1,250 |
|
| Senior Notes due May 2028, interest payable semi-annually at 4.250% ("2028 Notes") | 400 |
| | — |
|
| Senior Notes due August 2046, interest payable semi-annually at 4.500% ("2046 Notes") | 500 |
| | 500 |
|
| Senior Notes due May 2048, interest payable semi-annually at 4.750% ("2048 Notes") | 600 |
| | — |
|
| Revolving Credit Facility (2) | 582 |
| | 195 |
|
| Other | (45 | ) | | 15 |
|
| | 9,038 |
| | 8,763 |
|
| Current portion | (40 | ) | | (1,045 | ) |
| Long-term debt, excluding current portion | $ | 8,998 |
| | $ | 7,718 |
|
| |
| (1) | These SeniorAs of September 30, 2019, the weighted-average interest rate of the Floating Rate Notes were repaid on April 13, 2018 with borrowings on the Revolving Credit Facility.was 0.00%. |
| |
| (2) | Interest on the Revolving Credit Facility is generally payable at LIBOR plus an applicable margin of up to 1.625% plus an unused commitment fee of up to 0.225%, each based upon the Company's corporate credit ratings. As of September 30, 2018,2019, the weighted average interest rate on the Revolving Credit Facility, excluding fees, was 3.42%3.08%. |
Short-term borrowings as of September 30, 2019 and December 31, 2018, consisted of the following (in millions):
|
| | | | | | | |
| | September 30, | | December 31, |
| | 2019 | | 2018 |
| Euro-commercial paper notes ("ECP Notes") (1) | $ | 2,856 |
| | $ | — |
|
| U.S. commercial paper notes ("USCP Notes") (2) | 150 |
| | 250 |
|
| Other | 163 |
| | 17 |
|
| Total short-term borrowings | $ | 3,169 |
| | $ | 267 |
|
| |
| (1) | As of September 30, 2019, the weighted-average interest rate of the ECP Notes was (0.17)%, resulting in a reduction to Interest expense, net. |
| |
| (2) | As of September 30, 2019, the weighted-average interest rate of the USCP Notes was 2.28%. |
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
On May 21, 2019, FIS completed the issuance and sale of Euro- and Pound Sterling-denominated senior notes, consisting of €500 million in aggregate principal amount of Floating Rate Senior Notes due 2021 (the “Floating Rate Notes”), €500 million in aggregate principal amount of 0.125% Senior Notes due 2021 (the “May 2021 Euro Notes”), €1.25 billion in aggregate principal amount of 0.750% Senior Notes due 2023 (the “2023 Euro Notes”), €1.25 billion in aggregate principal amount of 1.500% Senior Notes due 2027 (the “2027 Euro Notes”), €1 billion in aggregate principal amount of 2.000% Senior Notes due 2030 (the “2030 Euro Notes”), €500 million in aggregate principal amount of 2.950% Senior Notes due 2039 (the “2039 Euro Notes”), £625 million of 2.602% Senior Notes due 2025 (the “2025 GBP Notes”), and £625 million of 3.360% Senior Notes due 2031 (the “2031 GBP Notes”). Also on May 21, 2019, FIS completed the issuance and sale of U.S. Dollar-denominated senior notes, consisting of $1.0 billion in aggregate principal amount of 3.750% Senior Notes due 2029 (the “2029 Notes”). The proceeds of the debt issuances were subsequently used to pay the cash portion of the purchase price and certain of the costs and expenses of the Worldpay transaction and to repay the outstanding Worldpay bank debt and notes.
On May 29, 2019, FIS established a Euro-commercial paper (“ECP”) program for the issuance and sale of senior, unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any time of $4.7 billion (or its equivalent in other currencies). The ECP Notes will have maturities of up to 183 days from the date of issue. The ECP program was used to pay for certain of the costs and expenses of the Worldpay transaction. The ECP program is also used for general corporate purposes.
During March 2019, concurrent with the execution of the Worldpay merger agreement (see Note 3), FIS secured $9.5 billion of bridge financing commitments to ensure our ability to fund the cash requirements related to the Worldpay transaction. The bridge financing commitments were terminated in full in May 2019 following the (a) amendment of the Restated Credit Agreement to modify certain provisions and covenants of the Revolving Credit Facility and (b) the issuance of the senior notes discussed above.
On December 21, 2018, FIS entered into an interest rate swap that effectively converted the 2024 Euro Notes from a fixed-rate to a floating rate debt obligation. This derivative instrument was designated as a fair value hedge of the debt obligation. The fair value of the interest rate swap was $18 million at September 30, 2019, reflected as an increase in the hedged debt balance.
On September 21, 2018, FIS established a U.S. commercial paper (“USCP”) program for the issuance and sale of senior, unsecured commercial paper notes, up to a maximum aggregate amount outstanding at any time of $4.0 billion. On May 29, 2019, FIS increased the capacity on the USCP program from $4 billion to $5.5 billion. The USCP Notes have maturities of up to 397 days from the date of issue.
On September 21, 2018, FIS entered into a Seventh Amendment and Restatement Agreement (“Credit Facility Amendment”Agreement”), which amendsamended and restatesrestated FIS’ existing credit agreement (as amended, the “Restated Credit Agreement”). The Credit Facility Amendment increasesAgreement increased the revolving credit commitments outstanding under the revolving credit facilityRevolving Credit Facility (“Revolving Credit Facility”) existing under the Restated Credit Agreement from $3.0 billion to $4.0 billion and extendsextended the term of the Restated Credit Agreement to September 21, 2023. BorrowingsOn May 29, 2019, FIS entered into an amendment to the Restated Credit Agreement to increase the revolving credit commitments outstanding under the Revolving Credit Facility from $4.0 billion to $5.5 billion. Borrowing under the Revolving Credit Facility will generally be used for general corporate purposes, including backstopping any Notesnotes that FIS may issue under the Commercial Paper ProgramUSCP and ECP programs described below.above. As of September 30, 2018,2019, the outstanding principal balance of the Revolving Credit Facility was $582$560 million, with $3,412$4,937 million of borrowing capacity remaining thereunder (net of $6$3 million in outstanding letters of credit issued under the Revolving Credit Facility).
On September 21, 2018, FIS established a U.S. commercial paper program (the “Commercial Paper Program”) for the issuance and sale of senior, unsecured commercial paper notes (the “Notes”), up to a maximum aggregate amount outstanding at any time of $4.0 billion. The Notes will have maturities of up to 397 days from the date of issue. The proceeds of the Notes are expected to be used for general corporate purposes. As of September 30, 2018, there were no outstanding Notes under the Commercial Paper Program.
The obligations of FIS under the FISRevolving Credit Agreement, Commercial Paper ProgramFacility, USCP and underECP programs, and all of its outstanding senior notes rank equal in priority and are unsecured. The FISRevolving Credit AgreementFacility and the senior notes are subject to customary covenants, including, among others, customary events of default, and for the Revolving Credit Facility, a provision allowing for financing related to the acquisition of Worldpay and limitations on the payment of dividends by FIS.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
covenants, including, among others, limitations under the FIS Credit Agreement on the payment of dividends by FIS, and customary events of default.
On March 15, 2017, FIS redeemed 100% of the outstanding aggregate principal amount of its $700 million 5.000% Senior Notes due March 2022 (the "March 2022 Notes"). On February 1, 2017, the Company also paid down the outstanding balance on the syndicated term loan agreement ("2018 Term Loans"). The redemption of the March 2022 Notes and the repayment of the 2018 Term Loans were funded by borrowings under the Revolving Credit Facility and cash proceeds from the sale of the Public Sector and Education business. As a result of the redemption of the March 2022 Notes and the repayment of the 2018 Term Loans, FIS incurred a pre-tax charge of approximately $25 million consisting of the call premium on the March 2022 Notes and the write-off of previously capitalized debt issuance costs.
On July 10, 2017, FIS issued €1,000 million and £300 million principal amount of senior notes in an inaugural European bond offering. The senior notes include €500 million of Senior Notes due in 2021 that bear interest at 0.400%, £300 million of Senior Notes due in 2022 that bear interest at 1.700% and €500 million of Senior Notes due in 2024 that bear interest at 1.100%. Net proceeds from the offering, after deducting discounts and underwriting fees, were $1,491 million using a conversion rate of 1.12 EUR/USD and 1.27 GBP/USD.
On July 25, 2017, pursuant to cash tender offers ("Tender Offers"), FIS repurchased approximately $2,000 million in aggregate principal amount of debt securities with a weighted average coupon of approximately 4%. The following approximate amounts of FIS' debt securities were repurchased: $600 million of its 3.625% notes due 2020, $600 million of its 5.000% notes due 2025, $200 million of its 4.500% notes due 2022, $300 million of its 3.875% notes due 2024 and $300 million of its 3.500% notes due 2023. The Company funded the Tender Offers with proceeds from the European bond offering and borrowings on its Revolving Credit Facility, approximately $469 million of which were almost immediately repaid with proceeds from the sale of a majority ownership stake in the Capco consulting business and risk and compliance consulting business, which was completed on July 31, 2017 (see Note 12). FIS paid approximately $150 million in tender premiums to par to purchase the notes in the Tender Offers and incurred a pre-tax charge upon extinguishment of approximately $167 million in tender premiums, the write-off of previously capitalized debt issue costs and other direct costs.
On May 16, 2018, FIS issued $1,000 million principal amount of new senior notes, including $400 million of Senior Notes due in 2028 that bear interest at 4.250% and $600 million of Senior Notes due in 2048 that bear interest at 4.750%. Net proceeds from the offering, after deducting discounts and underwriting fees, were $979 million. FIS used the proceeds to partially repay its Revolving Credit Facility.
On June 15, 2018, FIS redeemed 100% of the outstanding aggregate principal amount of its $750 million 2.850% Senior Notes due October 2018. As a result of the redemption, FIS incurred a pre-tax charge of approximately $1 million consisting of the call premium and the write-off of previously capitalized debt issuance costs.
The following summarizes the aggregate maturities of our long-term debt, including other financing obligations for certain hardware and capital leasessoftware, based on stated contractual maturities, excluding the fair value of the interest rate swap and net unamortized non-cash bond premiums and discounts of $41$31 million, as of September 30, 20182019 (in millions).
:
|
| | | | |
| | | Total |
| 2019 remaining period | | $ | 26 |
|
| 2020 | | 1,222 |
|
| 2021 | | 2,453 |
|
| 2022 | | 691 |
|
| 2023 | | 2,633 |
|
| Thereafter | | 10,138 |
|
| Total principal payments | | 17,163 |
|
| Debt issuance costs, net of accumulated amortization | | (108 | ) |
| Total long-term debt | | $ | 17,055 |
|
|
| | | | |
| | | Total |
| 2018 | | $ | 13 |
|
| 2019 | | 36 |
|
| 2020 | | 1,157 |
|
| 2021 | | 1,331 |
|
| 2022 | | 691 |
|
| Thereafter | | 5,912 |
|
| Total principal payments | | 9,140 |
|
| Debt issuance costs, net of accumulated amortization | | (61 | ) |
| Total long-term debt | | $ | 9,079 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
There are no mandatory principal payments on the Revolving Credit Facility and any balance outstanding on the Revolving Credit Facility will be due and payable at its scheduled maturity date, which occurs at September 21, 2023.
FIS may redeem the 2020 Notes, 2021 Euro Notes, May 2021 Euro Notes, 20222021 Notes, 2022 GBP Notes, 2022 Notes, 2023 Notes, 2023 Euro Notes, 2024 Notes, 2024 Euro Notes, 2025 GBP Notes, 2025 Notes, 2026 Notes, 2027 Euro Notes, 2028 Notes, 2029 Notes, 2030 Euro Notes, 2031 GBP Notes, 2039 Euro Notes, 2046 Notes and 2048 Notes at its option in whole or in part, at any time and from time to time, at a redemption price equal to the greater of 100% of the principal amount to be redeemed and a make-whole amount calculated as described in the related indenture in each case plus accrued and unpaid interest to, but excluding, the date of redemption, provided no make-whole amount will be paid for redemptions of the 2020 Notes, the 2021 Euro Notes, the May 2021 Euro Notes, the 2021 EuroNotes, the 2022 GBP Notes and the 2022 GBP2023 Euro Notes during the one month prior to their maturity, the 2022 Notes during the two months prior to their maturity, the 2023 Notes, the 2024 Notes, the 2024 Euro Notes, the 2025 GBP Notes, the 2025 Notes, the 2026 Notes, the 2027 Euro Notes, the 2028 Notes, the 2029 Notes, the 2030 Euro Notes, the 2031 GBP Notes and the 20282039 Euro Notes during the three months prior to their maturity, and the 2046 Notes and 2048 Notes during the six months prior to their maturity.
Debt issuance costs of $61$108 million, net of accumulated amortization, remain capitalized as of September 30, 2018,2019, related to all of the above outstanding debt.
We monitor the financial stability of our counterparties on an ongoing basis. The lender commitments under the undrawn portions of the Revolving Credit Facility are comprised of a diversified set of financial institutions, both domestic and international. The failure of any single lender to perform its obligations under the Revolving Credit Facility would not adversely impact our ability to fund operations.
The fair value of the Company’s long-term debt is estimated to be approximately $97$1,146 million lowerhigher than the carrying value excluding the fair value of the interest rate swap and unamortized discounts as of September 30, 2018.2019. This estimate is based on quoted prices of our senior notes and trades of our other debt in close proximity to September 30, 20182019, which are considered Level 2-type measurements. This estimate is subjective in nature and involves uncertainties and significant judgment in the interpretation of current market data. Therefore, the values presented are not necessarily indicative of amounts the Company could realize or settle currently.
(8) Financial Instruments
AsForward Contracts
During the second quarter of September 30, 2018, we had no outstanding interest rate swap transactions and no significant forward contracts.
Net Investment Hedges
In June 2017,2019, the Company entered into two Euro-denominated foreign currency forward exchange forward contracts totaling €999 million and a GBP-denominated foreign currency exchange forward contract of £298 million, which were designated as a net investment hedge of its investment in Euro and GBP denominated operations, respectively, in order to reduce the volatility in the income statement caused byCompany's cash flows due to foreign exchange rate fluctuations during the changes in foreign currency exchange rates of the Euro and GBP with respectperiod leading up to the U.S. dollar.
In July 2017,Company’s Euro- and Pound Sterling-denominated debt issuances related to the Worldpay transaction (see Note 7 for further discussion of these debt issuances). These forward contracts above were terminated and the Company designated its Euro-denominated Senior Notes due 2021 (€500 million) and Senior Notes due 2024 (€500 million) and GBP-denominated Senior Notes due 2022 (£300 million) assettled on July 31, 2019, resulting in a net investment hedgepre-tax gain of its investment in Euro and GBP denominated operations, respectively, in order to reduce the volatility in the income statement caused by the changes in foreign currency exchange rates of the Euro and GBP with respect to the U.S. dollar.$1 million
The change in fair value of the net investment hedges due to remeasurement of the effective portion is recorded in other comprehensive income (loss). The ineffective portion of the hedging instruments impacts net income when the ineffectiveness occurs. During the three months and nine months ended September 30, 2018, net investment hedge combined gains of $10 million and $38 million, net of tax, respectively, were recognized in other comprehensive income as a component of foreign currency translation adjustments. No ineffectiveness was recorded on the net investment hedges above.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
during the three months and a net pre-tax loss of $14 million during the nine months ended September 30, 2019. As of September 30, 2019, and December 31, 2018, the Company had 0 significant forward contracts outstanding.
Cash Flow Hedges
During the second quarter of 2019, the Company entered into treasury lock and forward-starting interest rate swap contracts with total notional amounts of €1.5 billion, £500 million, and $500 million to reduce the volatility in the Company’s cash flows due to changes in the benchmark interest rates during the period leading up to the Company’s fixed-rate debt issuances related to the Worldpay transaction (see Note 7 for further discussion of these debt issuances). The Company designated these derivatives as cash flow hedges for accounting purposes. During May 2019, in conjunction with the debt issuances, the Company terminated these contracts for an aggregate cash settlement payment of $17 million, which was recorded as a component of Other comprehensive earnings on the Condensed Consolidated Statement of Comprehensive Earnings (Unaudited). The amounts in Other comprehensive earnings are reclassified as an adjustment to interest expense on the Condensed Consolidated Statement of Earnings (Unaudited) over the respective periods during which the related hedged interest payments are recognized in income, which range from four to 12 years. Settlement cash flows related to these contracts were recorded as Other financing activities, net on the Condensed Consolidated Statement of Cash Flows (Unaudited). As of September 30, 2019, and December 31, 2018, the Company had 0 outstanding cash flow hedge contracts.
Fair Value Hedge
During the fourth quarter of 2018, the Company entered into an interest rate swap with a €500 million notional value converting the interest rate exposure on the Company's 2024 Euro Notes from fixed to variable. The Company designated this interest rate swap as a fair value hedge for accounting purposes. The fair value of the interest rate swap was a $18 million asset at September 30, 2019, reflected as an increase in the hedged debt balance (see Note 7).
Net Investment Hedges
During the third quarter of 2019, in conjunction with the closing of the Worldpay acquisition, the Company designated certain debt issuances related to the Worldpay acquisition as net investment hedges of its investment in Euro- and Pound Sterling-denominated operations. As of September 30, 2019, an aggregate €7,616 million was designated as a net investment hedge of the Company's investment in Euro-denominated operations related to the Floating Rate Notes, May 2021 Euro Notes, 2023 Euro Notes, 2027 Euro Notes, 2030 Euro Notes, 2039 Euro Notes, and ECP Notes, and an aggregate £264 million was designated as a net investment hedge of the Company's Pound Sterling-denominated operations related to the 2031 GBP Notes.
During the fourth quarter of 2018, the Company entered into cross-currency interest rate swaps with an aggregate notional amount of $716 million, which were designated as net investment hedges of its investment in Euro- and Pound Sterling-denominated operations. The fair value of the cross-currency interest rate swaps was a net $35 million asset at September 30, 2019.
During the third quarter of 2017, the Company designated its 2021 Euro Notes (€500 million) and 2024 Euro Notes (€500 million) and 2022 GBP Notes (£300 million) as net investment hedges of its investment in Euro- and Pound Sterling-denominated operations, respectively.
The purpose of the Company's net investment hedges is to reduce the volatility of FIS' net investment value in its Euro- and Pound Sterling-denominated operations due to changes in foreign currency exchange rates.
The Company recorded net investment hedge aggregate gain (loss), net of tax, for the change in fair value as Foreign currency translation adjustments within Other comprehensive earnings on the Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) of $185 million and $10 million, during the three months and $198 million and $38 million during the nine months ended September 30, 2019 and 2018, respectively. No ineffectiveness was recorded on the net investment hedges.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(9) Operating Leases
The classification of the Company’s operating lease ROU assets and liabilities in the Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 2019 was as follows (in millions):
|
| | | | | | |
| | | Classification | | September 30, 2019 |
| Operating lease ROU assets | | Other noncurrent assets | | $ | 521 |
|
| | | | | |
| Operating lease liabilities | | Accounts payable, accrued and other liabilities | | $ | 129 |
|
| | | Other long-term liabilities | | 425 |
|
| Total operating lease liabilities | | | | $ | 554 |
|
Operating lease cost was $39 million and variable lease cost was $10 million for the three months and $103 million and $25 million for the nine months ended September 30, 2019, respectively. Cash paid for amounts included in the measurement of operating lease liabilities included in operating cash flows was $99 million for the nine months ended September 30, 2019. Operating lease ROU assets obtained in exchange for operating lease liabilities was $51 million for the nine months ended September 30, 2019. The weighted average remaining operating lease term was 5.9 years and the weighted average operating lease discount rate was 3.7% as of September 30, 2019.
Maturities of operating lease liabilities, as of September 30, 2019 were as follows (in millions):
|
| | | | |
| 2019 remaining period | | $ | 34 |
|
| 2020 | | 147 |
|
| 2021 | | 121 |
|
| 2022 | | 86 |
|
| 2023 | | 64 |
|
| Thereafter | | 181 |
|
| Total lease payments | | 633 |
|
| Less: Imputed interest | | (79 | ) |
| Total operating lease liabilities | | $ | 554 |
|
Aggregate future minimum operating lease payments for each of the years in the five years ending December 31, 2023, and thereafter, as of December 31, 2018 consisted of the following (in millions):
|
| | | | |
| 2019 | | $ | 121 |
|
| 2020 | | 104 |
|
| 2021 | | 80 |
|
| 2022 | | 51 |
|
| 2023 | | 38 |
|
| Thereafter | | 86 |
|
| Total | | $ | 480 |
|
(10) Commitments and Contingencies
Reliance Trust Claims
Reliance Trust Company (“Reliance”), the Company’s subsidiary, is named as a defendant in a class action arising out of its provision of services as the discretionary trustee for a 401(k) Plan (the “Plan”) for one of its customers. Plaintiffs in the action seek damages and attorneys’ fees, as well as equitable relief, on behalf of Plan participants for alleged breaches of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act of 1974. The action also makes claims1974 against Reliance and the Plan's sponsor and
FIDELITY NATIONAL INFORMATION SERVICES, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
record-keeper. Reliance is vigorously defending the action and believes that it has meritorious defenses. Pre-trial discovery has now been completed. Reliance contends that no breaches of fiduciary duty or prohibited transactions occurred and that the Plan suffered no damages. Plaintiffs allege damages of approximately $125 million.$115 million against all defendants. While we are unable at this time to estimate more precisely the potential loss or range of loss because of unresolved questions of fact and law, we believe that the ultimate resolution of the matter will not have a material impact on our financial condition. We do not believe a liability for this action is probable and, therefore, have not recorded a liability for this action.
Brazilian Tax Authorities Claims
In 2004, Proservvi Empreendimentos e Servicos, Ltda., the predecessor to Fidelity National Servicos de Tratamento de Documentos e Informatica Ltda. (“Servicos”), a subsidiary of Fidelity National Participacoes Ltda., our former item processing and remittance services operation in Brazil, acquired certain assets and employees and leased certain facilities from the Transpev Group (“Transpev”) in Brazil. Transpev’s remaining assets were later acquired by Prosegur, an unrelated third party. When Transpev discontinued its operations after the asset sale to Prosegur, it had unpaid federal taxes and social contributions owing to the Brazilian tax authorities. The Brazilian tax authorities brought a claim against Transpev and beginning in 2012 brought claims against Prosegur and Servicos on the grounds that Prosegur and Servicos were successors in interest to Transpev. To date, the Brazilian tax authorities filed 1113 claims against Servicos asserting potential tax liabilities of approximately $13$14 million. There are potentially 2625 additional claims against Transpev/Prosegur for which Servicos is named as a co-defendant or may be named, but for which Servicos has not yet been served. These additional claims amount to approximately $51$50 million making the total potential exposure for all 3738 claims approximately $64 million. We do not believe a liability for these 3738 total claims is probable and, therefore, have not recorded a liability for any of these claims.
Acquired Contingencies (SunGard)- Worldpay
The Company became responsible for certain contingencies which were assumed in the SunGard acquisition.Worldpay acquisition a Tax Receivable Agreement (“TRA”) under which the Company agreed to make payments to Fifth Third Bank (“Fifth Third”) of 85% of the federal, state, local and foreign income tax benefits realized by the Company as a result of certain tax deductions. Unless amended, payments under the TRA will be based on the cash savings realized by the Company by comparing the actual income tax liability of the Company to the amount of such taxes the Company would have been required to pay had there been no deductions related to the tax attributes. Under the agreement between the Company and Fifth Third, in certain specified circumstances, the Company may be required to make payments in excess of such cash savings. Obligations recorded in our financial statements pursuant to the TRA are based on estimates of future deductions and future tax rates. On an annual basis, the Company evaluates the assumptions underlying the TRA obligations. The Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 2018 includes2019 included a liability of $919 million relating to the TRA.
The timing and/or amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates in the future and the tax rate then applicable, the use of loss carryovers and amortizable basis. Payments under the TRA, if necessary, are required to be made no later than January 5th of the second year immediately following the taxable year in which the obligation occurred.
Fifth Third brought a declaratory judgment action alleging that the change of control of Worldpay after its acquisition by the Company triggered provisions in the TRA that would remove the contingency that adequate taxable income be earned to realize tax savings. The Company does not believe that there is merit to this claim, but regardless, even if Fifth Third prevails on this claim, it should not increase the recorded liabilities of $66 million largely related to tax compliance matters.the TRA as disclosed above, which are based on the assumption that adequate taxable income will be earned.
The following table summarizes our estimated commitments under the TRA as of September 30, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due in |
| Type of Obligation | | Total | | 2019 Remaining Period | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| Obligations under TRA | | $ | 919 |
| | $ | — |
| | $ | 124 |
| | $ | 103 |
| | $ | 692 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Indemnifications and Warranties
The Company generally indemnifies its clients, subject to certain limitations and exceptions, against damages and costs resulting from claims of patent, copyright, or trademark infringement associated solely with its customers' use of the Company's software applications or services. Historically, the Company has not made any material payments under such indemnifications but continues to monitor the conditions that are subject to the indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses when they are estimable. In addition, the Company warrants to customers that its software operates substantially in accordance with the software specifications. Historically, no material costs have been incurred related to software warranties and no accruals for warranty costs have been made.
(10)(11) Related Party Transactions
Cardinal Holdings
FIS holds a 38% ownership stake in Cardinal Holdings, L.P. (“Cardinal”) as of September 30, 2019 and December 31, 2018. The ownership stake in Cardinal is recorded as an equity method investment included within Other noncurrent assets on the Condensed Consolidated Balance Sheets (Unaudited). The carrying value of this equity method investment as of September 30, 2019 and December 31, 2018 was $130 million and $151 million, respectively.
On July 31, 2017, FIS closed on the sale of a majority ownership stake in its Capco consulting business and risk and compliance consulting business to Clayton, Dubilier & Rice L.P., by and through certain funds that it manages ("CD&R"). CD&R acquired a 60% interest in the entity (Cardinal Holdings, L.P. ("Cardinal")) and FIS obtained the remaining 40% interest, in each case before equity issued to management (Note 12). Cardinal became a related party effective July 31, 2017.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Uponupon closing on the sale of the Capco consulting business and risk and compliance consulting business, FIS and Cardinal entered into a short-term Transition Services Agreement ("TSA"(“TSA”), whereby FIS providesprovided various agreed upon services to Cardinal.Cardinal in 2018. FIS also provides ongoing management consulting services and other services to Cardinal. Amounts transacted through these agreements were not significant to the 20182019 and 20172018 periods presented.
Capco provided Banco Bradesco S.A. ("Banco Bradesco") with consulting services. Capco revenue and related party receivables from Banco Bradesco through the July 31, 2017 closing are included below under Brazilian Venture revenue and trade receivables from Banco Bradesco.
Brazilian Venture
The Company operates the Brazilian Venture with Banco Bradesco, in which FIS ownsowned a 51% controlling interest in a joint venture, to providethe Brazilian Venture that it operated with Banco Bradesco through December 31, 2018 and provided comprehensive, fully-outsourced transaction processing, call center, cardholder support and collection services to multiple card issuing clients in Brazil, including Banco Bradesco. The original accounting for thisFIS closed a transaction resulted in the establishment of a contract intangible asset and a liability for amounts payable to the original partner banks upon final migration of their respective card portfolios and achieving targeted volumes.
On September 28, 2018, FIS entered into an agreement with Banco Bradesco on December 31, 2018 to unwind the Brazilian Venture. Under thisVenture pursuant to an agreement the Brazilian Venture will spin-off certain assets of the business that also provide services to non-Bradesco clients to a new wholly-owned FIS subsidiary. The subsidiary will enterentered into a long-term commercial agreement to provide current and new services to Banco Bradesco that include software application licensing and management, card portfolio migration, business process outsourcing, fraud management and professional services. Banco Bradesco will then own 100% of the entity that previously housed the Brazilian Venture and its remaining assets that relate to card processing for Banco Bradesco, which Banco Bradesco will thereafter perform internally. FIS expects to complete the transaction in the first half of 2019. As of September 30, 2018, FIS met the criteria to present the assets and liabilities that it will no longer control as held for sale in its balance sheet. The transaction does not meet the standard necessary to be reported as discontinued operations.28, 2018. In the third quarter of 2018, FIS incurred impairment charges of $95 million related to the expected disposal, including impairments of its contract intangible asset, goodwill, and its assets held for sale, which were written-down to fair value less cost to sell (see Note 5). The impairment charges arewere included in the Corporate and Other segment results. The unamortized contract intangible asset balance as of September 30, 2018 was $0 million asAs a result of the impairment.disposal, Banco Bradesco was a related party through December 31, 2018. The Company recorded related party revenue from Banco Bradesco of $77 million and $244 million during the three and nine months ended September 30, 2018.
The board of directors for the Brazilian Venture declared a dividend during the three months ended September 30, 2018, and 2017, resulting in paymentsa payment to Banco Bradesco of $23 million and $23 million, respectively. The carrying value of the noncontrolling interest as of September 30, 2018 was $78 million.
The Company recorded revenue of $77 million and $81 million during the three months and $244 million and $250 million during the nine months ended September 30, 2018 and 2017, respectively, from Banco Bradesco. Revenue from Banco Bradesco included $19 million and $31 million of unfavorable currency impact during the three and nine months ended September 30, 2018, respectively, resulting from foreign currency exchange rate fluctuations between the U.S. Dollar and Brazilian Real.
A summary of the Company’s related party receivables and payables is as follows (in millions):
|
| | | | | | | | | | |
| | | | | September 30, | | December 31, |
| Related Party | | Balance Sheet Location | | 2018 | | 2017 |
| | | | | | �� | As Adjusted |
| Banco Bradesco | | Trade receivables | | $ | 9 |
| | $ | 47 |
|
| Banco Bradesco | | Contract assets | | 7 |
| | 5 |
|
| Banco Bradesco | | Assets held for sale | | 32 |
| | — |
|
| Banco Bradesco | | Accounts payable and accrued liabilities | | 9 |
| | 10 |
|
| Banco Bradesco | | Other long-term liabilities | | 15 |
| | 17 |
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(11)(12) Net Earnings per Share
The basic weighted average shares and common stock equivalents for the three and nine months ended September 30, 2019 and 2018 and 2017 arewere computed using the treasury stock method.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table summarizes thenet earnings and net earnings per share attributable to FIS common stockholders for the three and nine months ended September 30, 20182019 and 20172018 (in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
| Net earnings attributable to FIS common stockholders | $ | 154 |
| | $ | 154 |
| | $ | 456 |
| | $ | 548 |
|
| Weighted average shares outstanding — basic | 516 |
| | 328 |
| | 388 |
| | 329 |
|
| Plus: Common stock equivalent shares | 8 |
| | 3 |
| | 8 |
| | 4 |
|
| Weighted average shares outstanding — diluted | 524 |
| | 331 |
| | 396 |
| | 333 |
|
| Net earnings per share — basic attributable to FIS common stockholders | $ | 0.30 |
| | $ | 0.47 |
| | $ | 1.18 |
| | $ | 1.67 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.29 |
| | $ | 0.47 |
| | $ | 1.15 |
| | $ | 1.65 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | | | As Adjusted | | | | As Adjusted |
| Net earnings attributable to FIS common stockholders | $ | 154 |
| | $ | 59 |
| | $ | 548 |
| | $ | 327 |
|
| Weighted average shares outstanding — basic | 328 |
| | 331 |
| | 329 |
| | 330 |
|
| Plus: Common stock equivalent shares | 3 |
| | 5 |
| | 4 |
| | 5 |
|
| Weighted average shares outstanding — diluted | 331 |
| | 336 |
| | 333 |
| | 335 |
|
| Net earnings per share — basic attributable to FIS common stockholders | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.67 |
| | $ | 0.99 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.65 |
| | $ | 0.98 |
|
Options to purchase 1approximately 0 million and 41 million shares of our common stock for the three months and 1 million and 41 million shares for the nine months ended September 30, 20182019 and 2017,2018, respectively, were not included in the computation of diluted earnings per share because they were anti-dilutive.
On July 20, 2017 our Board of Directors approved a plan authorizing repurchases of up to $4.0 billion of our outstanding common stock in the open market at prevailing market prices or in privately negotiated transactions through December 31, 2020. This share repurchase authorization replaced any existing share repurchase authorization.
(12) Divestitures(13) Segment Information
On July 31, 2017, FIS closedAs a result of the Company’s acquisition of Worldpay, the Company reorganized its reportable segments and recast all prior-period segment information presented to align with the new reportable segments. The new segments are Merchant Solutions, Banking Solutions, and Capital Market Solutions, which are organized based on the sale of a majority ownership stake in its Capco consulting businessmarkets and risk and compliance consulting business to CD&R for cash proceeds of approximately $469 million, resulting in a pre-tax loss of approximately $41 million. The divestiture is consistentclients served aligned with our strategy to focus on our IP-led businesses. CD&R acquired preferred units convertible into 60% of the common units of Cardinal and FIS obtained common units representing the remaining 40%, in each case before equity is issued to management. The preferred units are entitled to a quarterly dividend at an annual rate of 12%, payable in cash (if available) or additional preferred units at FIS' option. The businesses sold were included within the GFS and IFS segments. The sale did not meet the standard necessary to be reported as discontinued operations; therefore, the pre-tax loss and related prior period earnings remain reported within earnings. Prior to the sale, the Capco consulting business and risk and compliance consulting business' pre-tax earnings (loss), excluding certain unallocated corporate costs, for the three and nine months ended September 30, 2017 were $(4) million and $15 million, respectively.
FIS' ownership stake in Cardinal was initially valued at $172 million and is recorded as an equity method investment included within other noncurrent assets on the Condensed Consolidated Balance Sheet (Unaudited). After the sale on July 31, 2017, FIS began to recognize after-tax equity method investment earnings (loss) outside of operating income and segment Adjusted EBITDA. The carrying value of this equity method investment as of September 30, 2018 was $156 million. For periods prior to July 31, 2017, the Capco consulting business and risk and compliance consulting business were included within operating income and segment Adjusted EBITDA.
On February 1, 2017, the Company closed on the sale of the SunGard Public Sector and Education ("PS&E") business for $850 million, resulting in a pre-tax gain of $85 million. The transaction included all PS&E solutions which provided a comprehensive set of technology solutions to address public safety and public administration needs of government entitiesthey provide, as well as the needsCorporate and Other segment. The reorganization primarily consisted of K-12 school districts. adding a new Merchant Solutions segment, renaming the former Integrated Financial Solutions segment to Banking Solutions and the former Global Financial Solutions segment to Capital Market Solutions, and moving certain of the Company’s existing business lines to align with these new segments. Below is a summary of each segment.
Merchant Solutions ("Merchant")
The divestitureMerchant segment is consistentfocused on serving global merchants as well as merchants of all sizes enabling them to accept electronic payments, including credit, debit and prepaid payments originated at a physical point-of-sale as well as in card-not-present environments such as eCommerce and mobile. Merchant services include all aspects of payment processing, including authorization and settlement, customer service, chargeback and retrieval processing, reporting for electronic payment transactions and network fee and interchange management. Merchant also includes value-added services, such as security and fraud prevention solutions, advanced data analytics and information management solutions, foreign currency management and numerous funding options. Our Merchant clients are highly-diversified, including non-discretionary everyday spend categories, such as grocery and pharmacy, and include 13 of the U.S. top 25 national retailers by revenue in 2018, as well as global enterprises and small to medium sized businesses. The Merchant segment utilizes broad and varied distribution channels, including direct sales forces and multiple referral partner relationships that provide us with our strategya growing and diverse client base.
Banking Solutions ("Banking")
The Banking segment is focused on serving global clients for transaction and account processing; payment solutions; digital channel solutions; lending and wealth and retirement solutions; risk, fraud management and compliance solutions; and services capitalizing on the continuing trend to serveoutsource these solutions. Clients in this segment include global financial institutions, U.S. regional and community banks, credit unions and commercial lenders, as well as government institutions, and other commercial organizations. Banking serves clients in more than 130 countries around the financial services markets.world. Our applications include core processing software, which clients use to maintain the primary records of their customer accounts, and complementary
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Cash proceeds were used to reduce outstanding debt (see Note 7). Net cash proceeds, after payment of taxes and transaction-related expenses, were approximately $500 million. The PS&E business was included in the Corporate and Other segment. The sale did not meet the standard necessary to be reported as discontinued operations; therefore, the gain and related prior period earnings remain reported within earnings. Prior to the sale, PS&E's pre-tax earnings, excluding certain unallocated corporate costs, for the three and nine months ended September 30, 2017 were $0 million and $3 million, respectively.
(13) Segment Information
Integrated Financial Solutions ("IFS")
The IFS segment is focused primarily on serving North American clients for transaction and account processing, payment solutions, channel solutions, lending and wealth and retirement solutions, corporate liquidity, digital channels, risk and compliance solutions, and services, capitalizing on the continuing trend to outsource these solutions. Clients in this segment include regional and community banks, credit unions and commercial lenders, as well as government institutions, merchants and other commercial organizations. IFS’ primary software applications function as the underlying infrastructure of a financial institution's processing environment. These applications include core bank processing software, which banks use to maintain the primary records of their customer accounts, and complementary applications and services that interact directly with the core processing applications. This market is primarily served throughWe provide our clients integrated solutions and characterized by multi-year processing contracts that generate highly recurring revenue. The predictable nature of cash flows generated from thisthe Banking segment provides opportunities for further investments in innovation, integration, information and security, and compliance in a cost effectivecost-effective manner. The business solutionsresults in this segment included the risk and compliance consultingReliance Trust Company of Delaware business through its divestiture on JulyDecember 31, 2017 (Note 12).2018 and the Company's Brazilian Venture business through its divestiture as part of the joint venture unwinding transaction on December 31, 2018.
Global FinancialCapital Market Solutions ("GFS"Capital Markets")
The GFSCapital Markets segment is focused on serving the largest global financial institutions and/or international financial institutionsservices clients with a broad array of capital marketsbuy- and asset management and insurance solutions, as well as banking and paymentssell-side solutions.
GFS clients include the largest global financial institutions, including those headquartered Clients in the United States, as well as all international financial institutions we serve as clientsthis segment operate in more than 130 countries. These institutions face unique business50 countries around the world and regulatory challengesinclude asset managers, buy-and sell-side securities, brokerage and accounttrading firms, insurers, private equity firms, and other commercial organizations. Our buy- and sell-side solutions include a variety of mission critical applications for the majority of financial institution information technology spend globally. The purchasing patterns of GFS clients vary from those of IFS clients who typically purchase solutions on an outsourced basis. GFSrecord keeping, data and analytics, trading, financing and risk management. Capital Markets’ clients purchase our solutions and services in various ways including licensing and managing technology “in-house,” fully outsourced end-to-end solutions, and using consulting and third-party service providers.providers, as well as fully outsourced end-to-end solutions. We have long-established relationships with many of these financial and commercial institutions that generate significant recurring revenue. GFS clients also include asset managers, buy-We have and sell-side securitiescontinue to make investments in modern platforms; advanced technologies, such as cloud, open APIs, machine learning and trading firms, insurersartificial intelligence; and private equity firms. This segment also includes the Company's consolidated Brazilian Venture (Note 10). The business solutions in this segment included the Capco consulting business through its divestiture on July 31, 2017 (Note 12).regulatory technology to support our Capital Markets clients.
Corporate and Other
The Corporate and Other segment consists of corporate overhead expense, certain leveraged functions and miscellaneous expenses that are not included in the operating segments as well as certain non-strategic businesses. The non-strategic businesses in this segment include the PS&E business through its divestiture on February 1, 2017 (Note 12), Certegy Check Services business unit through its divestiture on August 31, 2018 (Note 5), and the global commercial services business.segments. The overhead and leveraged costs relate to marketing, corporate finance and accounting, human resources, legal, and amortization of acquisition-related intangibles and other costs, such as acquisition and integration expenses, that are not considered when management evaluates revenue-generating segment performance, such as acquisition, integration and certain other costs.performance. The Corporate and Other segment also includesincluded the impactCertegy Check Services business unit in North America until it was divested on revenue for 2018August 31, 2018.
During the three and 2017nine months ended September 30, 2019, the Company recorded acquisition and integration costs primarily related to the Worldpay transaction, and certain other costs including those associated with data center consolidation activities of adjusting SunGard's deferred revenue to fair value.
$25 million and $50 million, respectively. During the three and nine months ended September 30, 2018, the Company recorded acquisition, and integration costs primarily related to the SunGard acquisition and certain other costs including those associated with data center consolidation activities of $16 million and $122 million, respectively. During the three and nine months ended September 30, 2017 the Company recorded acquisition and integration costs primarily related to the SunGard acquisition of $22$16 million and $141$122 million, respectively.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Adjusted EBITDA
This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with Accounting Standards CodificationFASB ASC Topic 280, "Segment Reporting."Segment Reporting. Adjusted EBITDA is defined as EBITDA (defined as net incomeearnings (loss) before net interest expense, income tax provision (benefit) and depreciation and amortization, including amortization of purchased intangibles),amortization) plus certain non-operating items. The non-operating items affecting the segment profit measure generally include acquisition accounting adjustments;adjustments and acquisition, integration and certain other costs; and asset impairments.costs. For consolidated reporting purposes, these costs and adjustments are recorded in the Corporate and Other segment for the periods discussed below. Adjusted EBITDA for the respective segments excludes the foregoing costs and adjustments.
Summarized financial information for the Company’s segments is shown in the following tables. The Company does not evaluate performance or allocate resources based on segment asset data; therefore, such information is not presented.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of and for the three months ended September 30, 2019 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | Capital | | | | |
| | Merchant | | Banking | | Market | | Corporate | | |
| | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Revenue | $ | 720 |
| | $ | 1,491 |
| | $ | 611 |
| | $ | — |
| | $ | 2,822 |
|
| Operating expenses | 393 |
| | 982 |
| | 388 |
| | 919 |
| | 2,682 |
|
| Depreciation and amortization (including purchase accounting amortization) | 44 |
| | 132 |
| | 57 |
| | 519 |
| | 752 |
|
| EBITDA | 371 |
| | 641 |
| | 280 |
| | (400 | ) | | 892 |
|
| Acquisition, integration and other costs | — |
| | — |
| | — |
| | 213 |
| | 213 |
|
| Asset impairments | — |
| | — |
| | — |
| | 87 |
| | 87 |
|
| Adjusted EBITDA | $ | 371 |
| | $ | 641 |
| | $ | 280 |
| | $ | (100 | ) | | $ | 1,192 |
|
| | | | | | | | | | |
| EBITDA | | | | | | | | | $ | 892 |
|
| Interest expense, net | | | | | | | | | 95 |
|
| Depreciation and amortization | | | | | | | | | 206 |
|
| Purchase accounting amortization | | | | | | | | | 546 |
|
| Other income (expense) unallocated | |
| | |
| | |
| | |
| | 159 |
|
| Provision (benefit) for income taxes | | | | | | | | | 48 |
|
| Net earnings attributable to noncontrolling interest | | | | | | | | | 2 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | | | $ | 154 |
|
| Capital expenditures (1) | $ | 47 |
| | $ | 157 |
| | $ | 59 |
| | $ | 20 |
| | $ | 283 |
|
| |
| (1) | Capital expenditures for the three months ended September 30, 2019 include $24 million in other financing obligations for certain hardware and software. |
As of and for the three months ended September 30, 2018 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | Capital | | | | |
| | Merchant | | Banking | | Market | | Corporate | | |
| | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Revenue | $ | 50 |
| | $ | 1,433 |
| | $ | 589 |
| | $ | 12 |
| | $ | 2,084 |
|
| Operating expenses | 43 |
| | 980 |
| | 354 |
| | 365 |
| | 1,742 |
|
| Depreciation and amortization (including purchase accounting amortization) | 3 |
| | 124 |
| | 39 |
| | 188 |
| | 354 |
|
| EBITDA | 10 |
| | 577 |
| | 274 |
| | (165 | ) | | 696 |
|
| Acquisition deferred revenue adjustment | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Acquisition, integration and other costs | — |
| | — |
| | — |
| | 16 |
| | 16 |
|
| Asset impairments | — |
| | — |
| | — |
| | 95 |
| | 95 |
|
| Adjusted EBITDA | $ | 10 |
| | $ | 577 |
| | $ | 274 |
| | $ | (53 | ) | | $ | 808 |
|
| | | | | | | | | | |
| EBITDA | | | | | | | | | $ | 696 |
|
| Interest expense, net | | | | | | | | | 80 |
|
| Depreciation and amortization | | | | | | | | | 173 |
|
| Purchase accounting amortization | | | | | | | | | 181 |
|
| Other income (expense) unallocated | | | | | | | | | (62 | ) |
| Provision (benefit) for income taxes | | | | | | | | | 37 |
|
| Net earnings attributable to noncontrolling interest | | | | | | | | | 9 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | | | $ | 154 |
|
| Capital expenditures | $ | 3 |
| | $ | 99 |
| | $ | 46 |
| | $ | 1 |
| | $ | 149 |
|
|
| | | | | | | | | | | | | | | |
| | IFS | | GFS | | Corporate and Other | | Total |
| Revenue | $ | 1,090 |
| | $ | 916 |
| | $ | 78 |
| | $ | 2,084 |
|
| Operating expenses | 681 |
| | 632 |
| | 429 |
| | 1,742 |
|
| Depreciation and amortization | 87 |
| | 71 |
| | 15 |
| | 173 |
|
| Purchase accounting amortization | — |
| | — |
| | 181 |
| | 181 |
|
| EBITDA | 496 |
| | 355 |
| | (155 | ) | | 696 |
|
| Acquisition deferred revenue adjustment | — |
| | — |
| | 1 |
| | 1 |
|
| Acquisition, integration and other costs | — |
| | — |
| | 16 |
| | 16 |
|
| Asset impairments | — |
| | — |
| | 95 |
| | 95 |
|
| Adjusted EBITDA | $ | 496 |
| | $ | 355 |
| | $ | (43 | ) | | $ | 808 |
|
| | | | | | | | |
| EBITDA | | | | | | | $ | 696 |
|
| Interest expense, net | | | | | | | 80 |
|
| Depreciation and amortization | | | | | | | 173 |
|
| Purchase accounting amortization | | | | | | | 181 |
|
| Other income (expense) unallocated | |
| | |
| | |
| | (62 | ) |
| Provision (benefit) for income taxes | | | | | | | 37 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | | | | | 9 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | $ | 154 |
|
| Capital expenditures (1) | $ | 79 |
| | $ | 66 |
| | $ | 4 |
| | $ | 149 |
|
| Total assets | $ | 10,724 |
| | $ | 8,027 |
| | $ | 4,943 |
| | $ | 23,694 |
|
| Goodwill | $ | 7,662 |
| | $ | 5,796 |
| | $ | 127 |
| | $ | 13,585 |
|
| |
| (1) | Capital expenditures for the three months ended September 30, 2018 include $1 million of capital leases.in other financing obligations for certain hardware and software. |
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of and for the threenine months ended September 30, 20172019 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | Capital | | | | |
| | Merchant | | Banking | | Market | | Corporate | | |
| | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Revenue | $ | 896 |
| | $ | 4,317 |
| | $ | 1,778 |
| | $ | — |
| | $ | 6,991 |
|
| Operating expenses | 536 |
| | 2,938 |
| | 1,149 |
| | 1,522 |
| | 6,145 |
|
| Depreciation and amortization (including purchase accounting amortization) | 50 |
| | 393 |
| | 161 |
| | 884 |
| | 1,488 |
|
| EBITDA | 410 |
| | 1,772 |
| | 790 |
| | (638 | ) | | 2,334 |
|
| Acquisition, integration and other costs | — |
| | — |
| | — |
| | 293 |
| | 293 |
|
| Asset impairments | — |
| | — |
| | — |
| | 87 |
| | 87 |
|
| Adjusted EBITDA | $ | 410 |
| | $ | 1,772 |
| | $ | 790 |
| | $ | (258 | ) | | $ | 2,714 |
|
| | | | | | | | | | |
| EBITDA | | | | | | | | | $ | 2,334 |
|
| Interest expense, net | | | | | | | | | 242 |
|
| Depreciation and amortization | | | | | | | | | 594 |
|
| Purchase accounting amortization | | | | | | | | | 894 |
|
| Other income (expense) unallocated | |
| | |
| | |
| | |
| | (26 | ) |
| Provision (benefit) for income taxes | | | | | | | | | 119 |
|
| Net earnings attributable to noncontrolling interest | | | | | | | | | 3 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | | | $ | 456 |
|
| Capital expenditures (1) | $ | 52 |
| | $ | 360 |
| | $ | 167 |
| | $ | 24 |
| | $ | 603 |
|
|
| | | | | | | | | | | | | | | |
| | IFS | | GFS | | Corporate and Other | | Total |
| Revenue | $ | 1,038 |
| | $ | 975 |
| | $ | 83 |
| | $ | 2,096 |
|
| Operating expenses | 648 |
| | 702 |
| | 361 |
| | 1,711 |
|
| Depreciation and amortization | 79 |
| | 64 |
| | 16 |
| | 159 |
|
| Purchase accounting amortization | — |
| | — |
| | 183 |
| | 183 |
|
| EBITDA | 469 |
| | 337 |
| | (79 | ) | | 727 |
|
| Acquisition deferred revenue adjustment | — |
| | — |
| | 2 |
| | 2 |
|
| Acquisition, integration and other costs | — |
| | — |
| | 22 |
| | 22 |
|
| Adjusted EBITDA | $ | 469 |
| | $ | 337 |
| | $ | (55 | ) | | $ | 751 |
|
| | | | | | | | |
| EBITDA | | | | | | | $ | 727 |
|
| Interest expense, net | | | | | | | 84 |
|
| Depreciation and amortization | | | | | | | 159 |
|
| Purchase accounting amortization | | | | | | | 183 |
|
| Other income (expense) unallocated | | | | | | | (182 | ) |
| Provision (benefit) for income taxes | | | | | | | 50 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | | | | | 10 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | $ | 59 |
|
| Capital expenditures (1) | $ | 82 |
| | $ | 66 |
| | $ | 4 |
| | $ | 152 |
|
| Total assets | $ | 10,268 |
| | $ | 8,460 |
| | $ | 5,577 |
| | $ | 24,305 |
|
| Goodwill | $ | 7,662 |
| | $ | 5,867 |
| | $ | 170 |
| | $ | 13,699 |
|
| |
| (1) | Capital expenditures for the threenine months ended September 30, 20172019 include $1$59 million of capital leases.in other financing obligations for certain hardware and software. |
As of and for the nine months ended September 30, 2018 (in millions):
| | | | | | | | Capital | | | | |
| | | | | | | | | | Merchant | | Banking | | Market | | Corporate | | |
| | IFS | | GFS | | Corporate and Other | | Total | Solutions | | Solutions | | Solutions | | and Other | | Total |
| Revenue | $ | 3,275 |
| | $ | 2,742 |
| | $ | 239 |
| | $ | 6,256 |
| $ | 205 |
| | $ | 4,238 |
| | $ | 1,770 |
| | $ | 43 |
| | $ | 6,256 |
|
| Operating expenses | 2,094 |
| | 1,977 |
| | 1,196 |
| | 5,267 |
| 173 |
| | 2,956 |
| | 1,126 |
| | 1,012 |
| | 5,267 |
|
| Depreciation and amortization | 259 |
| | 208 |
| | 44 |
| | 511 |
| |
| Purchase accounting amortization | — |
| | — |
| | 549 |
| | 549 |
| |
| Depreciation and amortization (including purchase accounting amortization) | | 8 |
| | 364 |
| | 117 |
| | 571 |
| | 1,060 |
|
| EBITDA | 1,440 |
| | 973 |
| | (364 | ) | | 2,049 |
| 40 |
| | 1,646 |
| | 761 |
| | (398 | ) | | 2,049 |
|
| Acquisition deferred revenue adjustment | — |
| | — |
| | 4 |
| | 4 |
| — |
| | — |
| | — |
| | 4 |
| | 4 |
|
| Acquisition, integration and other costs | — |
| | — |
| | 122 |
| | 122 |
| — |
| | — |
| | — |
| | 122 |
| | 122 |
|
| Asset impairments | — |
| | — |
| | 95 |
| | 95 |
| — |
| | — |
| | — |
| | 95 |
| | 95 |
|
| Adjusted EBITDA | $ | 1,440 |
| | $ | 973 |
| | $ | (143 | ) | | $ | 2,270 |
| $ | 40 |
| | $ | 1,646 |
| | $ | 761 |
| | $ | (177 | ) | | $ | 2,270 |
|
| | | | | | | | | | | | | | | | | |
| EBITDA | | | | | | | $ | 2,049 |
| | | | | | | | | $ | 2,049 |
|
| Interest expense, net | | | | | | | 225 |
| | | | | | | | | 225 |
|
| Depreciation and amortization | | | | | | | 511 |
| | | | | | | | | 511 |
|
| Purchase accounting amortization | | | | | | | 549 |
| | | | | | | | | 549 |
|
| Other income (expense) unallocated | |
| | |
| | |
| | (71 | ) | | | | | | | | | (71 | ) |
| Provision (benefit) for income taxes | | | | | | | 122 |
| | | | | | | | | 122 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | | | | | 23 |
| |
| Net earnings attributable to noncontrolling interest | | | | | | | | | | 23 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | $ | 548 |
| | | | | | | | | $ | 548 |
|
| Capital expenditures (1) | $ | 254 |
| | $ | 201 |
| | $ | 10 |
|
| $ | 465 |
| |
| Capital expenditures | | $ | 8 |
| | $ | 311 |
| | $ | 142 |
| | $ | 4 |
| | $ | 465 |
|
| |
| (1) | Capital expenditures for the nine months ended September 30, 2018 include $1 million of capital leases.in other financing obligations for certain hardware and software. |
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of and for the nine months ended September 30, 2017 (in millions):
|
| | | | | | | | | | | | | | | |
| | IFS | | GFS | | Corporate and Other | | Total |
| Revenue | $ | 3,162 |
| | $ | 3,064 |
| | $ | 276 |
| | $ | 6,502 |
|
| Operating expenses | 2,018 |
| | 2,317 |
| | 1,166 |
| | 5,501 |
|
| Depreciation and amortization | 230 |
| | 193 |
| | 48 |
| | 471 |
|
| Purchase accounting amortization | — |
| | — |
| | 544 |
| | 544 |
|
| EBITDA | 1,374 |
| | 940 |
| | (298 | ) | | 2,016 |
|
| Acquisition deferred revenue adjustment | — |
| | — |
| | 6 |
| | 6 |
|
| Acquisition, integration and other costs | — |
| | — |
| | 141 |
| | 141 |
|
| Adjusted EBITDA | $ | 1,374 |
| | $ | 940 |
| | $ | (151 | ) | | $ | 2,163 |
|
| | | | | | | | |
| EBITDA | | | | | | | $ | 2,016 |
|
| Interest expense, net | | | | | | | 267 |
|
| Depreciation and amortization | | | | | | | 471 |
|
| Purchase accounting amortization | | | | | | | 544 |
|
| Other income (expense) unallocated | | | | | | | (123 | ) |
| Provision (benefit) for income taxes | | | | | | | 260 |
|
| Net (earnings) loss attributable to noncontrolling interest | | | | | | | 24 |
|
| Net earnings attributable to FIS common stockholders | | | | | | | $ | 327 |
|
| Capital expenditures (1) | $ | 289 |
| | $ | 224 |
| | $ | 15 |
| | $ | 528 |
|
| |
(1) | Capital expenditures for the nine months ended September 30, 2017 include $80 million of capital leases. |
Clients in Brazil, the United Kingdom, Germany, India, Australia, France and Switzerland accounted for the majority of the revenue from clients based outside of North America for all periods presented. Long-term assets, excluding goodwill and other intangible assets, located outside of the United States total $535 million and $532 million as of September 30, 2018 and 2017, respectively. These assets are predominantly located in the United Kingdom, India, Belgium, Germany, France, Australia and Brazil.
(14) Share Repurchase Program
Our Board of Directors has approved a series of plans authorizing repurchases of our common stock in the open market at prevailing market prices or in privately negotiated transactions, the most current of which on July 20, 2017, authorized repurchases of up to $4.0 billion through December 31, 2020. This share repurchase authorization replaced any existing share repurchase authorization plan. Approximately $2.8 billion of plan capacity remained available for repurchases as of September 30, 2018.
The table below summarizes annual share repurchase activity under these plans (in millions, except per share amounts):
|
| | | | | | | | | | | |
| | | | | | | Total cost of shares |
| | | | | | | purchased as part of |
| | | Total number of | | Average price | | publicly announced |
| Three months ended | | shares purchased | | paid per share | | plans or programs |
| September 30, 2018 | | 4.3 |
| | $ | 106.98 |
| | $ | 465 |
|
| June 30, 2018 | | 2.1 |
| | $ | 95.83 |
| | $ | 200 |
|
| March 31, 2018 | | 4.1 |
| | $ | 97.70 |
| | $ | 401 |
|
| December 31, 2017 | | 1.1 |
| | $ | 93.24 |
| | $ | 105 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless stated otherwise or the context otherwise requires, all references to “FIS,” “we,” the “Company” or the “registrant” are to Fidelity National Information Services, Inc., a Georgia corporation, and its subsidiaries.
The following discussion should be read in conjunction with Item 1: Condensed Consolidated Financial Statements (Unaudited) and the Notes thereto included elsewhere in this report. The statements contained in this Form 10-Q or in our other documents or in oral presentations or other statements made by our management that are not purely historical are forward-looking statements within the meaning of the U.S. federal securities laws. Statements that are not historical facts, including statements about anticipated financial outcomes, including any earnings guidance of the Company, business and market conditions, outlook, foreign currency exchange rates, expected dividends and share repurchases, the Company’s sales pipeline and anticipated profitability and growth, as well as other statements about our expectations, beliefs, intentions, or strategies regarding the future are forward-looking statements. These statements relate to future events and our future results and involve a number of risks and uncertainties. Forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Any statements that refer to beliefs, expectations, projections or other characterizations of future events or circumstances and other statements that are not historical facts are forward-looking statements. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms and other comparable terminology.
Actual results, performance or achievement could differ materially from those contained in these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to include the following, without limitation:
the risk that the Worldpay transaction will not provide the expected benefits, or that we will not be able to achieve the cost or revenue synergies anticipated;
the risk that the integration of FIS and Worldpay will be more difficult, time-consuming or expensive than anticipated;
the risk of customer loss or other business disruption in connection with the Worldpay transaction, or of the loss of key employees;
the fact that unforeseen liabilities of FIS or Worldpay may exist;
the risk that acquired businesses will not be integrated successfully, or that the integration will be more costly or more time-consuming and complex than anticipated;
the risk that cost savings and other synergies anticipated to be realized from acquisitions may not be fully realized or may take longer to realize than expected;
the riskrisks of doing business internationally;
changes in general economic, business and political conditions, including the possibility of intensified international hostilities, acts of terrorism, changes in either or both the United States and international lending, capital and financial markets and currency fluctuations;
the effect of legislative initiatives or proposals, statutory changes, governmental or other applicable regulations and/or changes in industry requirements, including privacy and cybersecurity laws and regulations;
the risks of reduction in revenue from the elimination of existing and potential customers due to consolidation in, or new laws or regulations affecting, the banking, retail and financial services industries or due to financial failures or other setbacks suffered by firms in those industries;
changes in the growth rates of the markets for our solutions;
failures to adapt our solutions to changes in technology or in the marketplace;
internal or external security breaches of our systems, including those relating to unauthorized access, theft, corruption or loss of personal information and computer viruses and other malware affecting our software or platforms, and the reactions of customers, card associations, government regulators and others to any such events;
the risk that implementation of software (including software updates) for customers or at customer locations or employee error in monitoring our software and platforms may result in the corruption or loss of data or customer information, interruption of business operations, outages, exposure to liability claims or loss of customers;
the reaction of current and potential customers to communications from us or regulators regarding information security, risk management, internal audit or other matters;
competitive pressures on pricing related to the decreasing number of community banks in the U.S., the development of new disruptive technologies competing with one or more of our solutions, increasing presence of international competitors in the U.S. market and the entry into the market by global banks and global companies with respect to certain competitive solutions, each of which may have the impact of unbundling individual solutions from a comprehensive suite of solutions we provide to many of our customers;
the failure to innovate in order to keep up with new emerging technologies, which could impact our solutions and our ability to attract new, or retain existing, customers;
the failure to meet financial goals to grow the business in Brazil after the unwinding of the Brazilian Venture;
the risks of reduction in revenue from the loss of existing and/or potential customers in Brazil after the unwinding of the Brazilian Venture;
an operational or natural disaster at one of our major operations centers;
failure to comply with applicable requirements of payment networks or card schemes or changes in those requirements;
fraud by merchants or bad actors; and
other risks detailed elsewhere in this document under Part II Item 1A. Risk Factors, and in the Risk Factors and other sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, in our Quarterly Reports on Form 10-Q and in our other filings with the Securities and Exchange Commission.
Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition, results of operations and prospects. Accordingly, readers should not place undue reliance on these forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Except as required by applicable law or regulation, we do not undertake (and expressly disclaim) any obligation and do not intend to publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.
Overview
FIS is a global leaderleading provider of technology solutions for merchants, banks and capital markets firms globally. Our 55,000 people are dedicated to advancing the way the world pays, banks and invests by applying our scale, deep expertise and data-driven insights. We help our clients use technology in financial services technology with a focus on retailinnovative ways to solve business-critical challenges and institutional banking, payments, asset management and wealth and retirement, risk and compliance and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries.deliver superior experiences for their customers. Headquartered in Jacksonville, Florida, FIS employs more than 52,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500500® company and is a member of the Standard & Poor’s 500® Index.
We have grown organically, as well as through acquisitions, which have contributed critical applications and services that complement or enhance our existing offerings, diversifying our revenue by customer, geography and service offering. We evaluate possible acquisitions that might contribute to our growth or performance on an ongoing basis.
On July 31, 2019, FIS completed the previously announced acquisition of Worldpay. See Note 3 to the Notes to Condensed Consolidated Financial Statements (Unaudited) for additional discussion. Through its acquisition of Worldpay, FIS is now a global leader in financial technology, solutions and services for merchants, as well as banks and capital markets. The completionWorldpay acquisition brings an integrated technology platform with a comprehensive suite of products and services serving merchants and financial institutions. In 2018, Worldpay processed over 40 billion transactions, supporting more than 300 payment types across 146 countries and 126 currencies. Through the Worldpay transaction, FIS has enhanced global payment capabilities, robust risk and fraud solutions and advanced data analytics.
As a result of the SunGardCompany’s acquisition on November 30, 2015 increased our existing portfolioof Worldpay, the Company reorganized its reportable segments and recast all prior-period segment information presented to include solutions that automate a wide range of complex business processes for financial services institutionsalign with the new reportable segments. The new segments are Merchant Solutions (“Merchant”), Banking Solutions (“Banking”), and corporate and government treasury departments.
FIS reports its financial performanceCapital Market Solutions (“Capital Markets”), which are organized based on three segments: Integrated Financial Solutions (“IFS”), Global Financial Solutions (“GFS”)the markets and clients served aligned with the solutions they provide, as well as the Corporate and Other.Other segment. A description of these segments is included in Note 13 to the Notes to Condensed Consolidated Financial Statements (Unaudited). Revenue by segment and the adjusted EBITDA of our segments are discussed below in Segment Results of Operations.
Business Trends and Conditions
Our revenue is primarily derived from a combination of recurring technology and processing services, payment transaction fees, professional services and software license fees. The majority of our revenue has historically been recurring, and has been provided under multi-year contracts that contribute relative stability to our revenue stream. These services, in general, are considered critical to our clients' operations. A considerable portion of our recurring revenue is derived from transaction processing fees that fluctuate with the level of accounts and card transactions, among other variable measures, associated with consumer, commercial and capital markets activity. Professional services revenue is typically non-recurring, and sales of software licenses are less predictable, a portionpredictable.
The SunGard acquisition broadened our solution portfolio, enabling us
We continue to expand beyond our traditional banking and payments markets into the institutional and wholesale side ofassist financial institutions as well as other capital markets organizations. It also significantly expanded our existing solutions and client base in wealth and retirement, treasury and corporate payments. These solutions are in demand among our regional and community financial institution clients as they look for ways to replace highly regulated fee revenue. The combination also favorably impacted our revenue mix, with a greater concentration of license revenue and higher margin services. Through the integration of SunGard into our existing operations, we achieved significant cost savings around administration and technology expenses and exited 2017 with a cost synergy run-rate savings exceeding $325 million.
We are actively migrating many financial institutions to outsourced integrated technology solutions to improve their profitability and address increasing and ongoing regulatory requirements. As a provider of outsourcing solutions, we benefit from multi-year recurring revenue streams, which help moderate the effects of broader year-to-year economic and market changes that otherwise might have a larger impact on our results of operations. We believe our integrated solutions and outsourced services are well-positionedwell positioned to address this outsourcing trend across the markets we serve.
Over the last three years, we have moved approximately 50% of our server compute to our FIS cloud located in our strategic data centers, and our goal is to increase that percentage to 65% by the end of 2019 and approximately 80% by the end of 2021. This allows us to further enhance security for our clients’ data and increases the flexibility and speed with which we can provide services and solutions to our clients, eventually at lesser cost. Concurrently, we have continued to consolidate our data centers, closing 10 additional data centers in 2018. Our consolidation has generated a savings for the Company as of year-end 2018 exceeding $100 million in run rate annual expense reduction since the program’s inception in mid-2016. We plan to close and consolidate approximately 20 more data centers by 2021, which should result in additional run rate annual expense reduction of approximately $150 million.
We continue to invest in modernization, innovation and integrated solutions and services in order to meet the demands of the markets we serve and compete with global banks, international providers, and disruptive technology innovators. We invest both organically and through investment opportunities in companies building complementary technologies in the financial services space. Our internal efforts in research and development activities have related primarily to the modernization of our proprietary core systems, design and development of next generation digital and innovative solutions and development of processing systems and related software applications and risk management platforms. We have increased our investments in these areas in each of the last three years. We expect to continue our practice of investing an appropriate level of resources to maintain, enhance and extend the functionality of our proprietary systems and existing software applications, to develop new and innovative software applications and systems to address emerging technology trends in response to the needs of our clients and to enhance the capabilities of our outsourcing infrastructure.
Consumer preference continues to shift from traditional branch banking services to digital banking solutions, and our clients seek to provide a single integrated banking experience through their branch, mobile, internet and voice-bankingvoice banking channels. We have been providing our large regional banking customers in the U.S. with Digital One, an integrated digital banking platform, and are focused on enablingnow adding functionality and offering Digital One to our community bank clients to deliver thisprovide a consistent, omnichannel experience for consumers of banking services across self-service channels like mobile banking and online banking, as well as supporting channels for bank staff operating in bank branches and contact centers. The uniform customer experience will extend to theirsupport a broad range of financial services including opening new accounts, servicing of existing accounts, providing money movement services, and personal financial management, as well as other consumer, small business and commercial banking capabilities. Digital One will be integrated into and will extend the core banking platforms offered by FIS and will also be offered to customers through our integrated solutionsof non-FIS core banking systems.
and services. We continue to innovate and invest in these integrated solutions and services to assist clients as they address this market demand. This is an area of ongoing competition from global banks, international providers and disruptive technology innovators.
We continue to see demand for innovative solutions in the payments market that will deliver faster, more convenient payment solutions in mobile channels, internet applications and cards. We believe digital paymentsOur acquisition of Worldpay will grow and partially replace existing payment tender volumes over time as consumers and merchants embrace the convenience, incremental services and benefits. Additionally, new formidable non-traditional payments competitors and large merchants are investing in and innovating digital payment technologieshelp position us to address the emerging market opportunity, and it is unclear the extent to which particular technologies or services will succeed. We believe the growth of digital payments continues to present both an opportunity and a risk to us as the market develops. Although we cannot predict which digital payment technologies or solutions will be successful, we cautiously believe our client relationships, payments infrastructure and experience, adapted solutions and emerging solutions are well-positioned to maintain or grow our clients' existing payment volumes, which is our focus.capitalize on this demand.
High profile North American merchant payment card information security breaches have pushed the payment card industry towards EMV integrated circuit cards as financial institutions, card networks and merchants seek to improve information security and reduce fraud costs. We invested in our card management solutions and card manufacturing and processing capabilities to accommodate EMV integrated circuit cards so we can continue to guide our clients through this technology transition and grow our card-driven businesses. A large portion of the migration to EMV is complete. The remaining portion will continue as financial institutions issue replacement cards.
We anticipate consolidation within the banking industry will continue, primarily in the form of merger and acquisition activity among financial institutions, which we believe as a whole is detrimental to our business.the financial technology industry. However, consolidation resulting from specific merger and acquisition transactions may be beneficial to our business. When consolidations of financial institutions occur, merger partners often operate systems obtained from competing service providers. The newly formed entity generally makes a determination to migrate its core and payments systems to a single platform. When a financial institution processing client is involved in a consolidation, we may benefit by their expanding the use of our services if such services are chosen to survive the consolidation and support the newly combined entity. Conversely, we may lose revenue if we are providing services to both entities, or if a client of ours is involved in a consolidation and our services are not chosen to survive the consolidation and support the newly combined entity. It is also possible that larger financial institutions resulting from consolidation may have greater leverage in negotiating terms or could decide to perform in-house some or all of the services that we currently provide or could provide. We seek to mitigate the risks of consolidations by offering other competitive services to take advantage of specific opportunities at the surviving company.
Notwithstanding challenging global economic conditions, our ongoingIn certain of the international markets in which we do business, continuedwe continue to experience growth in the first nine months of 2018 on a constant currency basis. Demand for our solutions may also continue to be driven in developing countries by government-led financial inclusion policies aiming to reduce the unbanked population and by growth in the middle classes in these markets driving the need for more sophisticated banking solutions. The majority of our international revenue is generated by clients in the United Kingdom, Germany, Brazil, Australia, India and Canada. For the full year of 2018,2019, we anticipate an approximate $55$78 million adverse
impact to revenue due to foreign currency translation.translation, although the actual amount of impact is uncertain due to the many factors that affect exchange rates.
As a result of the Worldpay acquisition, FIS is now a global leader in the payments industry, with differentiated solutions throughout the payments market, including capabilities in global eCommerce, U.S. integrated payments, and enterprise payments and data security solutions in business-to-business (“B2B”) payments. These solutions bring together advanced payments technologies at each stage of the transaction life cycle.
The payment processing industry is adopting new technologies, developing new products and services, evolving new business models and being affected by new market entrants and an evolving regulatory environment. As merchants and financial institutions respond to these changes by seeking services to help them enhance their own offerings to consumers, including the ability to accept card-not-present (“CNP”) payments in eCommerce and mobile environments as well as contactless cards and mobile wallets at the point-of-sale, FIS believes that payment processors will seek to develop additional capabilities in order to serve clients’ evolving needs. In order to facilitate this expansion, we believe that payment processors will need to enhance their technology platforms so they can deliver these capabilities and differentiate their offerings from other providers.
We believe that these market changes present both an opportunity and a risk for us, and we cannot predict which emerging technologies or solutions will be successful. However, FIS believes that payment processors, like FIS, that have scalable, integrated business models, provide solutions across the payment processing value chain and utilize broad distribution capabilities will be best positioned to enable emerging alternative electronic payment technologies. Further, FIS believes that its depth of capabilities and breadth of distribution will enhance its position as emerging payment technologies are adopted by merchants and other businesses. FIS’ ability to partner with non-financial institution enterprises, such as mobile payment providers, internet, retail and social media companies, could create attractive growth opportunities as these new entrants seek to become more active participants in the development of alternative electronic payment technologies and to facilitate the convergence of retail, online, mobile and social commerce applications.
On September 28,December 31, 2018, FIS entered into an agreement with Banco Bradescoclosed the transaction we previously announced to unwind the Brazilian Venture.Venture with Banco Bradesco. Under this agreement, the Brazilian Venture will spin-offspun-off certain assets of the business that also provide services to non-Bradesco clients to a new wholly-owned FIS subsidiary. TheThis subsidiary will enterentered into a long-term commercial agreement to provide current and new services to Banco Bradesco effective January 1, 2019 that include software application licensing, andmaintenance, application management, card portfolio migration, business process outsourcing, fraud management and professional services. As a result of the transaction, Banco Bradesco will then ownowns 100% of the entity that previously housed the Brazilian Venture and its remaining assets that relate to card processing for Banco Bradesco, which Banco Bradesco will thereafter perform internally. FIS expects to complete the transaction in the first half of 2019. Post-closing, theThe transaction is expected to result in an annualized reduction in FIS’ reported revenue of approximately $200 million with minimal impact to its net earnings.$225 million. In addition, it resulted in impairment charges of $95 million in the third quarter of 2018. The transaction is subject to Brazilian regulatory approval and FIS expects to complete the transaction in the first half of 2019. For further detail on our Brazilian Venture see Note 10 of the Notes to Condensed Consolidated Financial Statements (Unaudited) and Item 1A. Risk Factors included in Part II in this report on Form 10-Q.
Globally, attacks on information technology systems continue to grow in frequency, complexity and sophistication. This is a trend we expect to continue. Such attacks have become a point of focus for individuals, businesses and governmental entities. The objectives of these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupt operations, cause denial of service events, corrupt data, and steal non-public information. These circumstances present both a threat and an opportunity for FIS. As part of our business, we electronically receive, process, store and transmit a wide
range of confidential information, including sensitive customer information and personal consumer data. We also operate payment, cash access and prepaid card systems.
FIS remains focused on making strategic investments in information security to protect our clients and our information systems. This includes both capital expenditures and operating expense on hardware, software, personnel and consulting services. We also participate in industry and governmental initiatives to improve information security for our clients. Through the expertise we have gained with this ongoing focus and involvement, we have developed fraud, security, risk management and compliance solutions to target this growth opportunity in the financial services industry.
As described in Note 12 of the Notes to Condensed Consolidated Financial Statements (Unaudited), on July 31, 2017, we sold a majority interest in certain of our consulting businesses to affiliates of CD&R. These businesses had lower margins than many of our other businesses. The consulting businesses sold were included within the GFS and IFS segments. Also, on February 1, 2017, we sold our PS&E business, which had been included in our Corporate and Other segment. These divestitures affect the comparability of our results of operations for the 2018 and 2017 periods presented.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, except for "Revenue Recognition" noted below.2018.
Revenue Recognition
32
The Company generates revenue in a number of ways, including from the delivery of account- or transaction-based processing, software as a service ("SaaS"), business process as a service ("BPaaS"), cloud offerings, software licensing, software related services, and professional services. We are frequently a party to multiple concurrent contracts with the same client. These situations require judgment to determine whether the individual contracts should be combined or evaluated separately for purposes of revenue recognition. In making this determination, we consider the timing of negotiating and executing the contracts, whether the different elements of the contracts are negotiated as a package with a single commercial objective, whether the solutions or services promised in the contracts are a single performance obligation, and whether any of the payment terms of the contracts are interrelated. Our individual contracts also frequently include multiple promised solutions or services. At contract inception, we assess the solutions and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a solution or service (or bundle of solutions or services) that is distinct - i.e., if a solution or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. We must apply judgment in these circumstances in determining whether individual promised solutions or services can be considered distinct or should instead be combined with other promised solutions or services in the contract. We recognize revenue when or as we satisfy a performance obligation by transferring control of a solution or service to a customer. We must use judgment to determine the appropriate measure of progress for performance obligations satisfied over time and the timing of when the customer obtains control for performance obligations satisfied at a point in time. Judgment is also required in estimating and allocating variable consideration to one or more, but not all, performance obligations in a contract, determining the standalone selling prices of each performance obligation, and allocating the transaction price to each distinct performance obligation in a contract.
Due to the large number, broad nature and average size of individual contracts we are party to, the impact of judgments and assumptions that we apply in recognizing revenue for any single contract is not likely to have a material effect on our consolidated operations or financial position. However, the broader accounting policy assumptions that we apply across similar contracts or classes of clients could significantly influence the timing and amount of revenue recognized in our historical and future results of operations or financial position. Additional information about our revenue recognition policies is included in Notes 2 and 3 to the Condensed Consolidated Financial Statements (Unaudited).
Transactions with Related Parties
See Note 1011 of the Notes to Condensed Consolidated Financial Statements (Unaudited) for a detailed description of transactions with related parties.
Consolidated Results of Operations (Unaudited)
(in millions, except per share amounts)
| | | | Three months ended
September 30, | | Nine months ended September 30, | Three months ended September 30, | | Nine months ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| | | | As Adjusted * | | | | As Adjusted * | | | | | | | |
| Revenue | $ | 2,084 |
| | $ | 2,096 |
| | $ | 6,256 |
| | $ | 6,502 |
| $ | 2,822 |
| | $ | 2,084 |
| | $ | 6,991 |
| | $ | 6,256 |
|
| Cost of revenue | 1,364 |
| | 1,386 |
| | 4,192 |
| | 4,397 |
| 1,838 |
| | 1,364 |
| | 4,623 |
| | 4,192 |
|
| Gross profit | 720 |
| | 710 |
| | 2,064 |
| | 2,105 |
| 984 |
| | 720 |
| | 2,368 |
| | 2,064 |
|
| Selling, general, and administrative expenses | 283 |
| | 325 |
| | 980 |
| | 1,104 |
| |
| Selling, general and administrative expenses | | 757 |
| | 283 |
| | 1,435 |
| | 980 |
|
| Asset impairments | 95 |
| | — |
| | 95 |
| | — |
| 87 |
| | 95 |
| | 87 |
| | 95 |
|
| Operating income | 342 |
| | 385 |
| | 989 |
| | 1,001 |
| 140 |
| | 342 |
| | 846 |
| | 989 |
|
| Other income (expense): | | | | | | | | | | | | | | |
| Interest expense, net | (80 | ) | | (84 | ) | | (225 | ) | | (267 | ) | (95 | ) | | (80 | ) | | (242 | ) | | (225 | ) |
| Other income (expense), net | (58 | ) | | (182 | ) | | (60 | ) | | (123 | ) | 164 |
| | (58 | ) | | (8 | ) | | (60 | ) |
| Total other income (expense), net | (138 | ) | | (266 | ) | | (285 | ) | | (390 | ) | 69 |
| | (138 | ) | | (250 | ) | | (285 | ) |
| Earnings before income taxes and equity method investment earnings (loss) | 204 |
| | 119 |
| | 704 |
| | 611 |
| 209 |
| | 204 |
| | 596 |
| | 704 |
|
| Provision (benefit) for income taxes | 37 |
| | 50 |
| | 122 |
| | 260 |
| 48 |
| | 37 |
| | 119 |
| | 122 |
|
| Equity method investment earnings (loss) | (4 | ) | | — |
| | (11 | ) | | — |
| (5 | ) | | (4 | ) | | (18 | ) | | (11 | ) |
| Net earnings | 163 |
| | 69 |
| | 571 |
| | 351 |
| 156 |
| | 163 |
| | 459 |
| | 571 |
|
| Net (earnings) loss attributable to noncontrolling interest | (9 | ) | | (10 | ) | | (23 | ) | | (24 | ) | (2 | ) | | (9 | ) | | (3 | ) | | (23 | ) |
| Net earnings attributable to FIS common stockholders | $ | 154 |
| | $ | 59 |
| | $ | 548 |
| | $ | 327 |
| $ | 154 |
| | $ | 154 |
| | $ | 456 |
| | $ | 548 |
|
| | | | | | | | | | | | | | | |
| Net earnings per share — basic attributable to FIS common stockholders | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.67 |
| | $ | 0.99 |
| $ | 0.30 |
| | $ | 0.47 |
| | $ | 1.18 |
| | $ | 1.67 |
|
| Weighted average shares outstanding — basic | 328 |
| | 331 |
| | 329 |
| | 330 |
| 516 |
| | 328 |
| | 388 |
| | 329 |
|
| Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.65 |
| | $ | 0.98 |
| $ | 0.29 |
| | $ | 0.47 |
| | $ | 1.15 |
| | $ | 1.65 |
|
| Weighted average shares outstanding — diluted | 331 |
| | 336 |
| | 333 |
| | 335 |
| 524 |
| | 331 |
| | 396 |
| | 333 |
|
* See Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited).
Comparisons of three-month and nine-month periods ended September 30, 20182019 and 20172018
Revenue
Revenue decreased $12increased $738 million, or 0.6%35.4%, during the three-month period, primarily due to (1) incremental revenues from the Worldpay acquisition; (2) growth in Banking driven by license and professional services; and (3) growth in Capital Markets driven by processing and services. These increases were offset by (1) the unwinding of the Brazilian Venture; (2) the reduction in revenue from the sale of the Capco consultingCertegy Check Services business and the risk and compliance consulting businessunit in North America during the third quarter of 20172018; (3) the reduction in revenue from the sale of Reliance Trust Company of Delaware during the fourth quarter of 2018; and (4) unfavorable foreign currency impact of $19 million primarily driven by a stronger U.S. Dollar versus the British Pound Sterling and Euro.
Revenue increased $735 million, or 11.7%, during the nine-month period, primarily due to (1) incremental revenues from the Worldpay acquisition; these increases were partially offset by (1) the unwinding of the Brazilian Venture; (2) the reduction in revenue from the sale of the Certegy Check Services business unit in North America during the third quarter of 2018; (3) the reduction in revenue from the sale of Reliance Trust Company of Delaware during the fourth quarter of 2018; and (4)
unfavorable foreign currency impact of $63 million primarily driven by a stronger U.S. Dollar versus the British Pound Sterling, Euro and Brazilian Real.
See “Segment Results of Operations (Unaudited)” belowfor more detailed explanation.
Cost of Revenue and Gross Profit
Cost of revenue increased $474 million or 34.8% for the three-month period of 2019 as compared to 2018 resulting in a gross profit increase of $264 million or 36.7%. Gross profit as a percentage of revenue was 34.9% and 34.5% during the three-month periods ended September 30, 2019 and 2018, respectively. The increase in gross profit during the 2019 period as compared to 2018 primarily resulted from the revenue variances noted above. The increase in gross profit percentage during the 2019 period as compared to 2018 primarily resulted from higher margin revenue from the Worldpay acquisition, partially offset by higher acquired intangible asset amortization expense.
Cost of revenue increased $431 million or 10.3% for the nine-month period of 2019 as compared to 2018 resulting in a gross profit increase of $304 million or 14.7%. Gross profit as a percentage of revenue was 33.9% and 33.0% during the nine-month periods ended September 30, 2019 and 2018, respectively. The increase in gross profit during the 2019 period as compared to 2018 primarily resulted from the revenue variances noted above. The increase in gross profit percentage during the 2019 period as compared to 2018 primarily resulted from higher margin revenue from the Worldpay acquisition, partially offset by higher acquired intangible asset amortization expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $474 million or 167.5% for the three-month period of 2019 as compared to 2018. The year-over-year increase was primarily driven by (1) incremental Worldpay corporate and infrastructure expenses and (2) higher acquisition, integration and other costs. These increases were partially offset by (1) the sale of Reliance Trust Company of Delaware during the fourth quarter of 2018 and (2) the sale of the Certegy Check Services business unit in North America during the third quarter of 2018.
Selling, general and administrative expenses increased $455 million or 46.4% for the nine-month period of 2019 as compared to 2018. The year-over-year increase was primarily driven by (1) incremental Worldpay corporate and infrastructure expenses; (2) higher acquisition, integration and other costs; and (3) increased health care and other benefit plan expenses. These decreasesincreases were partially offset by (1) growth in retail payments; (2) increased volumes in banking and wealth solutions (excluding the effects of the sale of the risk and compliance consulting business); (3) growth in GFS banking and payments solutions in North America; and (4) payments growth in Latin America. Additionally, the three months ended September 30, 2018 was also impacted from a $30 million unfavorable foreign currency impact primarily resulting from a stronger U.S. Dollar in 2018 versus the Brazilian Real.
Revenue decreased $246 million, or 3.8%Reliance Trust Company of Delaware during the nine-month period, due to (1) the reduction in revenue from the sale of the Capco consulting business and the risk and compliance consulting business during the thirdfourth quarter of 2017;2018 and (2) the reduction in revenue from the sale of the PS&E business during the first quarter of 2017; and (3) a decline in retail check processing volumes and the sale of the Certegy Check Services business unit in North America during the third quarter of 2018. This decrease was partially offset by (1) increased volumes in banking and wealth solutions (excluding
Asset Impairments
During the effects of the sale of the risk and compliance consulting business); (2) growth in GFS banking and payments solutions in North America; (3) growth in corporate and digital solutions; (4) growth in retail payments; and (5) payments growth in Latin America. Additionally, the nine months
ended September 30, 2018 was also impacted by a $9 million unfavorable foreign currency impact primarily resulting from a stronger U.S. Dollar in 2018 versus the Brazilian Real.
See "Segment Results of Operations (Unaudited)" belowfor more detailed explanation.
Cost of Revenue and Gross Profit
Cost of revenue totaled $1,364 million and $1,386 million during the three-month periods and $4,192 million and $4,397 million during the nine-month periods ended September 30, 2018 and 2017, respectively, resulting in gross profit of $720 million and $710 million during the respective three-month periods and $2,064 million and $2,105 million during the nine-month periods ended September 30, 2018 and 2017, respectively. Gross profit as a percentage of revenue was 34.5% and 33.9% during the three-month periods and 33.0% and 32.4% during the nine-month periods ended September 30, 2018 and 2017, respectively. The change in gross profit during the 2018 period as compared to 2017 primarily resulted from the revenue variances noted above. The gross profit percentage change during the three and nine months ended September 30, 2018, as compared2019, the Company recorded pre-tax asset impairments totaling $87 million, primarily related to 2017, was positively affected bycertain computer software resulting from the Capco consulting business divestiture during 2017 as well as cost management initiatives.Company's net realizable value analysis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $283 million and $325 million during the three-month periods and $980 million and $1,104 million during the nine-month periods ended September 30, 2018 and 2017, respectively. The year-over-year decrease is primarily driven by the sale of PS&E during the first quarter of 2017, the sale of the Capco consulting business and risk and compliance consulting business during the third quarter of 2017, the sale of Certegy Check Services business unit during the third quarter of 2018 and cost management initiatives.
Asset Impairments
During September 2018, as a result of entering into an agreement to unwind the Brazilian Venture that the Company operatesoperated with Banco Bradesco, the Company recorded pre-tax asset impairments totaling $95 million, including $42 million for the Brazilian Venture contract intangible asset, $25 million for goodwill, and $28 million for the assets being held for sale that will bewere transferred to Banco Bradesco upon closing of the agreement (see Note 1011 of the Notes to Condensed Consolidated Financial Statements (Unaudited)).
Operating Income
Operating income totaled $342decreased $202 million and $385 million duringor 59.1%, for the three-month periodsperiod and $989$143 million and $1,001 million duringor 14.5% for the nine-month periods ended September 30,period of 2019 as compared to 2018, and 2017, respectively. Operating income as a percentage of revenue (“operating margin”) was 5.0% and 16.4% and 18.4% duringfor the three-month periods and 12.1% and 15.8% and 15.4% duringfor the nine-month periods ended September 30, 20182019 and 2017,2018, respectively. The changes in operating income for the three-month and nine-month periods of 20182019 as compared to 2017 resulted from2018 and the variances addressed above. The change in operating margin during the 2019 periods as compared to 2018 periods was negatively impacted by asset impairments. Excludingresulted from the asset impairments, operating margins improved primarily fromrevenue and cost management initiatives and the Capco consulting business divestiture during 2017.variances noted above.
Total Other Income (Expense), Net
Interest expense is typically the primary component of total other income (expense); however, during the three-month and nine-month periodperiods ended September 30, 2017,2019, other income (expense) was also a significant component.
The decreaseincrease of $4 million and $42$15 million in interest expense, net during the three-month period ended September 30, 2019 as compared to the 2018 period is primarily due to higher outstanding debt, partially offset by lower weighted-average interest rate on the outstanding debt and an increase in interest income on the proceeds from the Worldpay acquisition-related debt issuances prior to closing. The increase of $17 million in interest expense, net during the nine-month period ended September 30, 2019 as compared to the 2018 period is primarily due to higher outstanding debt, partially offset by lower weighted-average interest rate on the outstanding debt and increased interest income on the proceeds from the Worldpay acquisition-related debt issuances prior to closing.
Other income (expense), net increased $222 million and $52 million during the three-month and nine-month periods ended September 30, 20182019 as compared to the 20172018 periods, is primarily due to a lower weighted average interest rate on the outstanding debt.
respectively. Other income (expense), net decreased $124 million for the three-month periodsthree and $63 million for the nine-month periodsnine months ended September 30, 2018 as compared2019 includes the non-cash foreign currency impact of non-hedged Euro- and Pound Sterling-denominated notes issued to finance the Worldpay acquisition, during the period from the date of issue of the notes to the 2017 periods.date of the acquistition. Other income (expense), net for the three and nine months ended September 30, 2018 includes a pre-tax loss of $54 million on the sale of the Certegy Check Services business unit. Other income (expense) net for the three-month period ended September 30, 2017, includes a pre-tax loss of $33 million on the sale of the Capco consulting and risk and compliance business and other divestitures and a pre-tax charge of $167 millionunit in tender premiums and the write-off of previously capitalized debt issuance costs on the repurchase of approximately $2,000 million in aggregate principal of debt securities. Additionally, the nine months ended September 30, 2017 also include a pre-North America.
tax gain of $85 million on the sale of the PS&E business and a pre-tax charge of approximately $25 million due to the redemption of the Senior Notes due March 2022 and the pay down of the 2018 Term Loans, consisting of the call premium on the Senior Notes due March 2022 and the write-off of previously capitalized debt issuance costs.
Provision (Benefit) for Income Taxes
Income tax expense totaled $37$48 million and $50$37 million during the three-month periods and $122$119 million and $260$122 million during the nine-month periods ended September 30, 20182019 and 2017,2018, resulting in effective tax rates of 18%23.0% and 42%18.1% for the three-month periods and 17%20.0% and 43%17.3% for the the nine-month periods, respectively. The 2018 effective tax rate includes the impact of the reduction in the U.S. federal income tax rate from 35% to 21% due to tax reform enacted December 22, 2017. In addition to the federal tax rate of 35% for 2017, the 20172019 effective tax rates include the impact of the write-off of goodwill with no tax basisincludes less stock compensation benefit than in connection with the sale of our PS&E business and additional taxes related to book basis in the units of Cardinal in excess of tax basis.2018.
The Company included provisional amounts in its December 31, 2017 annual financial statements for certain tax reform items. These items were provisional as the data necessary for their completion was not fully available. As the amounts are finalized during the measurement period, the required adjustments, if any, will be recorded in the quarter when the final amount is determined.
Equity Method Investment Earnings (Loss)
On July 31, 2017, FIS obtainedholds a minority equity interest38% ownership stake in Cardinal, as further described in Note 1211 of the Notes to Condensed Consolidated Financial Statements (Unaudited). WeAs a result, we recorded losses from this equity method investment totalinglosses of $5 million and $4 million during the three-month periods and $18 million and $11 million during the three- and nine-month periods ended September 30, 2019 and 2018, respectively.
Net (Earnings) Loss Attributable to Noncontrolling Interest
Net (earnings) loss attributable to noncontrolling interest predominantly related to the joint venture in Brazil that was unwound on December 31, 2018 and totaled $(2) million and $(9) million for the three months and $(3) million and $(23) million during the nine months ended September 30, 2019 and 2018, respectively.
Net Earnings Attributable to FIS Common Stockholders
Net earnings attributable to FIS common stockholders totaled $154 million and $59$154 million resulting in earnings per diluted share of $0.47$0.29 and $0.18$0.47 for the three-month periods ended September 30, 20182019 and 2017,2018, respectively, and $548$456 million and $327$548 million resulting in earnings per diluted share of $1.65$1.15 and $0.98$1.65 for the nine-month periods ended September 30, 20182019 and 2017,2018, respectively. These results reflect the variances described above.
Segment Results of Operations (Unaudited)
Adjusted EBITDA is defined as EBITDA (defined as net incomeearnings (loss) before net interest expense, income tax provision (benefit) and depreciation and amortization, including amortization of purchased intangibles),amortization) plus certain non-operating items. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with Accounting Standards CodificationFASB ASC Topic 280, "Segment Reporting."Segment Reporting. The non-operating items affecting the segment profit measure generally include acquisition accounting adjustments;adjustments and acquisition, integration and certain other costs; and asset impairments.costs. For consolidated reporting purposes, these costs and adjustments are recorded in the Corporate and Other segment for the periods discussed below. Adjusted EBITDA for the respective segments excludes the foregoing costs and adjustments. Financial information, including details of our adjustments to EBITDA, for each of our segments is set forth in Note 13 to the Condensed Consolidated Financial Statements (Unaudited) included in Part I of this Quarterly Report.
IntegratedAs a result of the Company’s acquisition of Worldpay, the Company reorganized its reportable segments and recast all prior-period segment information presented to align with the new reportable segments. The new segments are Merchant Solutions, Banking Solutions, and Capital Market Solutions, which are organized based on the markets and clients served
aligned with the solutions they provide, as well as the Corporate and Other segment. A description of these segments is included in Note 13 to the Notes to Condensed Consolidated Financial SolutionsStatements (Unaudited). Revenue by segment and the adjusted EBITDA of our segments are discussed below in Segment Results of Operations.
(in millions)
Merchant Solutions
| | | | | | | | | | | | | | | | | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended | September 30, | | September 30, |
| | September 30, | | September 30, | 2019 | | 2018 | | 2019 | | 2018 |
| | 2018 | | 2017 | | 2018 | | 2017 | (In millions) | | (In millions) |
| Revenue | $ | 1,090 |
| | $ | 1,038 |
| | $ | 3,275 |
| | $ | 3,162 |
| $ | 720 |
| | $ | 50 |
| | $ | 896 |
| | $ | 205 |
|
| Adjusted EBITDA | $ | 496 |
| | $ | 469 |
| | $ | 1,440 |
| | $ | 1,374 |
| $ | 371 |
| | $ | 10 |
| | $ | 410 |
| | $ | 40 |
|
Three months ended September 30:
Revenue increased $52$670 million, or 5.0%, due to (1) growth in retail payments contributing 2.7%; (2) increased volumes in banking and wealth solutions (excludingincremental revenues from the effects of the sale of the risk and compliance consulting business) contributing 2.3%; and (3) growth in corporate and digital solutions contributing 0.5%. These items wereWorldpay acquisition totaling $680 million, partially offset by the sale of the risk and compliance consulting business contributing (0.5%).
Adjusted EBITDA increased $27 million, or 5.8%, primarily resulting from the revenue variances noted above and continued cost management initiatives. Adjusted EBITDA margin increased 30 basis points to 45.5% primarily driven by operating efficiencies.
Nine months ended September 30:
Revenue increased $113 million, or 3.6%, due to (1) increased volumes in banking and wealth solutions (excluding the effects of the sale of the risk and compliance consulting business) contributing 2.5%; (2) growth in corporate and digital solutions contributing 1.0%; and (3) growth in retail payments contributing 0.9%. These items were partially offset by the sale of the risk and compliance consulting business contributing (0.8%).
Adjusted EBITDA increased $66 million, or 4.8%, primarily resulting from the revenue variances noted above and continued cost management initiatives. Adjusted EBITDA margin increased 50 basis points to 44.0% primarily driven by a revenue mix shift and operating efficiencies.
Global Financial Solutions
(in millions)
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Revenue | $ | 916 |
| | $ | 975 |
| | $ | 2,742 |
| | $ | 3,064 |
|
| Adjusted EBITDA | $ | 355 |
| | $ | 337 |
| | $ | 973 |
| | $ | 940 |
|
Three months ended September 30:
Revenue decreased $59 million, or 6.1%, primarily due to (1) the sale of the Capco consulting business and other divestitures contributing (5.4%); and (2) unfavorable foreign currency impact contributing (3.1%) or approximately $30of $9 million primarily driven by a stronger U.S. Dollar versus the Brazilian Real. These decreases were partially offset by (1) growth in GFS banking and payments solutions in North America contributing 1.7%; and (2) and payments growth in Latin America contributing 0.9%.British Pound Sterling.
Adjusted EBITDA increased $18$361 million, or 5.3%,and adjusted EBITDA margin increased to 51.5% primarily due to the revenue variances noted above and continued cost management initiatives. Adjusted EBITDA margins increased 420 basis points to 38.8% resulting from higher margin revenue from the positive impact of the Capco consulting business divestiture during 2017, as well as continued cost management initiatives.Worldpay acquisition.
Nine months ended September 30:
Revenue decreased $322increased $691 million, due to incremental revenues from the Worldpay acquisition totaling $680 million and heritage FIS merchant solutions growth of $24 million, partially offset by unfavorable foreign currency impact of $11 million primarily driven by a stronger U.S. Dollar versus the British Pound Sterling.
Adjusted EBITDA increased $370 million, and adjusted EBITDA margin increased to 45.8% primarily resulting from higher margin revenue from the Worldpay acquisition.
Banking Solutions
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In millions) | | (In millions) |
| Revenue | $ | 1,491 |
| | $ | 1,433 |
| | $ | 4,317 |
| | $ | 4,238 |
|
| Adjusted EBITDA | $ | 641 |
| | $ | 577 |
| | $ | 1,772 |
| | $ | 1,646 |
|
Three months ended September 30:
Revenue increased $58 million, or 10.5%4.0%, primarily due to (1) incremental revenues from the Worldpay acquisition contributing 4.6%; (2) license and professional services growth contributing 2.9%, driven in part by the wealth and retirement business; and (3) the remaining revenue contributed 1.1% to growth due in part to strong network, digital payments and back office volumes as well as growth in card production. These increases were partially offset by (1) the reduction in revenue from the unwinding of the Brazilian Venture contributing (3.6%) and (2) the sale of the Capco consultingReliance Trust Company of Delaware business and other divestitures contributing (11.5%(0.5%); and (2). Banking Solutions had an unfavorable foreign currency impact contributing (0.4%(0.3%), or approximately $11$5 million, to growth primarily driven by a stronger U.S. Dollar versus the British Pound Sterling and Euro.
Adjusted EBITDA increased $64 million, or 11.1%, primarily resulting from the revenue variances noted above. Adjusted EBITDA margin increased 270 basis points to 43.0% primarily resulting from positive revenue mix, the addition of the higher margin Worldpay revenue, and the unwinding of lower margin Bradesco revenue.
Nine months ended September 30:
Revenue increased $79 million, or 1.9%, due to (1) incremental revenues from the Worldpay acquisition contributing 1.6%; (2) professional services growth contributing 1.0%; (3) license sales contributed 0.5% to growth, driven in part by the wealth and retirement business; and (4) the remaining revenue contributed 2.7% due in part to strong network, digital payments and back office volumes as well as growth in the card production business. These items were partially offset by (1) the unwinding of the Brazilian Venture, offset in part by the new commercial agreement with Banco Bradesco and growth in Latin America payments, contributing (2.7%) and (2) the reduction in revenue from the sale of Reliance Trust Company of Delaware business contributing (0.6%). Banking Solutions had an unfavorable foreign currency impact contributing (0.8%), or approximately $33 million, to growth primarily driven by a stronger U.S. Dollar versus the Brazilian Real, partially offset by (1) growth in GFS bankingBritish Pound Sterling and payments solutions in North America contributing 0.7%; and (2) payments growth in Latin America contributing 0.7%.Euro.
Adjusted EBITDA increased $33$126 million, or 3.5%7.7%, primarily resulting from favorablethe revenue mix and continued cost management initiatives.variances noted above. Adjusted EBITDA marginsmargin increased 480220 basis points to 35.5%41.0% primarily resulting from positive revenue mix, the positiveaddition of higher margin Worldpay revenue, and the unwinding of lower margin Bradesco revenue.
Capital Market Solutions
|
| | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In millions) | | (In millions) |
| Revenue | $ | 611 |
| | $ | 589 |
| | $ | 1,778 |
| | $ | 1,770 |
|
| Adjusted EBITDA | $ | 280 |
| | $ | 274 |
| | $ | 790 |
| | $ | 761 |
|
Three months ended September 30:
Revenue increased $22.0 million, or 3.7%, primarily due to (1) growth in processing and services revenue contributing 3.1% driven in part by the insurance and transfer agency businesses; (2) license and software growth contributing 1.2% driven in part by strong demand in the corporate liquidity business and risk and compliance solutions; and (3) professional services growth contributing 0.3%. These items were partially offset by unfavorable foreign currency impact ofcontributing (0.8%) or approximately $5 million, primarily driven by a stronger U.S. Dollar versus the Capco consulting business divestiture during 2017, as well asBritish Pound Sterling.
Adjusted EBITDA increased $6 million, or 2.2%, due to the revenue impacts mentioned above. Adjusted EBITDA margin decreased 70 basis points to 45.8%, due to increased incentive compensation, partially offset by continued cost management initiatives.management.
Nine months ended September 30:
Revenue increased $8 million, or 0.5%, primarily due to (1) growth in processing and services revenue contributing 0.7%; (2) license and software growth contributing 0.6%; and (3) professional services growth contributing 0.3%. These items were partially offset by unfavorable foreign currency impact contributing (1.1%) or approximately $19 million, primarily driven by a stronger U.S. Dollar versus the British Pound Sterling.
Adjusted EBITDA increased $29 million, or 3.8%, and adjusted EBITDA margin increased 140 basis points to 44.4% due to continued cost management.
Corporate and Other
(in millions)
| | | | | | | | | | | | | | | | | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended | September 30, | | September 30, |
| | September 30, | | September 30, | 2019 | | 2018 | | 2019 | | 2018 |
| | 2018 | | 2017 | | 2018 | | 2017 | (In millions) | | (In millions) |
| Revenue | $ | 78 |
| | $ | 83 |
| | $ | 239 |
| | $ | 276 |
| $ | — |
| | $ | 12 |
| | $ | — |
| | $ | 43 |
|
| Adjusted EBITDA | $ | (43 | ) | | $ | (55 | ) | | $ | (143 | ) | | $ | (151 | ) | $ | (100 | ) | | $ | (53 | ) | | $ | (258 | ) | | $ | (177 | ) |
The Corporate and Other segment results consist of selling, general and administrative expenses and depreciation and intangible asset amortization not otherwise allocated to the reportable segments. Corporate and Other also includes operations from non-strategic businesses, including our global commercial services business,the Certegy Check Services business unit (whichin North America until it was divested on August 31, 2018), and PS&E business (which was divested on February 1, 2017).2018.
Three months ended September 30:
Revenue decreased $5$12 million, or 6.0%100.0%, primarily from the reduction in revenue fromdue to the sale of the Certegy Check Services business unit in North America during the third quarter of 2018.
Adjusted EBITDA increased $12decreased $47 million, or 21.8%88.7%, primarily resulting from the early results of our data center consolidation program.due to incremental Worldpay corporate and infrastructure expenses.
Nine months ended September 30:
Revenue decreased $37$43 million, or 13.4%100.0%, primarily from the reduction in revenue from the sale of the PS&E business during the first quarter of 2017, as well as a decline in retail check processing volumes anddue to the sale of the Certegy Check Services business unit in North America during the third quarter of 2018.
Adjusted EBITDA increased $8decreased $81 million, or 5.3%45.8%, primarily resulting from a reduction indue to incremental Worldpay corporate and infrastructure technology expenses and the early results of of our data center consolidation program, partially offset by the revenue variance noted above.increased corporate health care and other benefit plan expenses.
Liquidity and Capital Resources
Cash Requirements
Our ongoing cash requirements include operating expenses, income taxes, tax receivable obligations, mandatory debt service payments, capital expenditures, stockholder dividends, working capital and timing differences in settlement-related assets and liabilities, and may include discretionary debt repayments, share repurchases and business acquisitions. Our principal sources of funds are cash generated by operations and borrowings, including the capacity under our Revolving Credit Facility, the U.S. commercial paper program and the Commercial Paper ProgramEuro-commercial paper program described in Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited).
As of September 30, 20182019, we had cash and cash equivalents of $632 million$1.3 billion and long-term debt of $9.0$20.2 billion, including the current portion, net of capitalized debt issuance costs. Of the $632 million$1.3 billion cash and cash equivalents, approximately $367$475 million is held by our foreign entities. The majority of our domestic cash and cash equivalents at September 30, 2019, represents net deposits-in-transit at the balance sheet dates and relates to daily settlement activity.
We expect that cash and cash equivalents plus cash flows from operations over the next 12 months will be sufficient to fund our operating cash requirements, capital expenditures and mandatory debt service.
We currently expect to continue to pay quarterly dividends. However, the amount, declaration and payment of future dividends is at the discretion of our Board of Directors and depends on, among other things, our investment opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by our Board of Directors, including legal and contractual restrictions. Additionally, the payment of cash dividends may be limited by covenants in certain debt agreements. A regular quarterly dividend of $0.32$0.35 per common share was paidis payable on September 28, 2018December 27, 2019 to shareholders of record as of the close of business on September 14, 2018.December 13, 2019.
On July 20, 2017, our Board of Directors approved a plan authorizing repurchases of up to $4.0 billion of our outstanding common stock in the open market at prevailing market prices or in privately negotiated transactions through December 31, 2020. This share repurchase authorization replaced any existing share repurchase authorization.
Approximately $2.3 billion of plan capacity remained available for repurchases as of September 30, 2019. Management suspended share repurchases as a result of the Worldpay transaction.
Cash Flows from Operations
Cash flows from operations were $1,288$1,741 million and $1,079$1,288 million during the nine-month periods ended September 30, 20182019 and 2017,2018, respectively. Our net cash provided by operating activities consists primarily of net earnings, adjusted to add back depreciation and amortization. Cash flows from operations were $209$453 million higher in the 20182019 period primarily due to (1) higher net earnings during 2018increased cash flow due to the impact of the reduction in the U.S. federal income tax rate from 35% to 21% due to tax reform enacted December 22, 2017 resulting in lower U.S. federal income tax payments and (2) lower trade receivables from increased collections resulting from a reduction in days sales outstanding. These increases were partially offset by U.S. federal estimated income tax payments normally due in the third and fourth quarters of 2017 that were paid during the first quarter of 2018 due to the Hurricane Irma Relief ProgramWorldpay acquisition and timing of working capital.capital, partially offset by transaction-related expenses.
Capital Expenditures and Other Investing Activities
Our principal capital expenditures are for computer software (purchased and internally developed) and additions to property and equipment. We invested approximately $464$544 million and $448$464 million in capital expenditures (excluding capital leases)other financing obligations for certain hardware and software) during the nine-month periods ended September 30, 20182019 and 2017,2018, respectively.
We used $6,629 million of cash (net of cash acquired, including restricted cash) during the nine months ended September 30, 2019 for the Worldpay acquisitions. See Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited).
Financing
For more information regarding the Company’s long-term debt and financing activity see Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited).
Contractual Obligations
There were no material changes in our contractual obligations during the first nine months of 20182019 in comparison to the table included in our Annual Report on Form 10-K as filed on February 22, 2018,21, 2019, except as disclosed in NoteNotes 7, 9 and 10 of the Notes to Condensed Consolidated Financial Statements (Unaudited).
Off-Balance Sheet Arrangements
FIS does not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”), “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments are meant to reduce the diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. ASU 2016-15 provides guidance as to the presentation on the statement of cash flows for eight specific cash flow issues, which are 1) debt prepayment for debt extinguishment costs, 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, 3) contingent consideration payments made after a business combination, 4) proceeds for the settlement of insurance claims, 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows and application of the predominance principle. For public companies, the amendments are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods beginning after December 15, 2019. Early adoption is permitted for any organization in any interim or annual period. FIS elected to adopt this standard in the third quarter of 2017. FIS has applied the presentation guidance above to its statements of cash flows and all adjustments have been reflected on a retrospecive basis. The primary impact of adopting the new guidance is our 2017 presentation of debt prepayment and related costs being reflected in financing activities rather than operating activities.
In August 2017, the FASB issued ASU No. 2017-12 (“ASU 2017-12”), “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” The amendments were meant to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. FIS elected to adopt this
standard as of January 1, 2018. The adoption of this ASU did not have an impact on the Company's Condensed Consolidated Financial Statements (Unaudited).
In March 2017, the FASB issued ASU No. 2017-07 (“ASU 2017-07”), “Compensation - Retirement Benefits.” The ASU improves the presentation of net periodic pension cost and net periodic postretirement benefit cost in the statements of operations. Under ASU 2017-07, the service cost component of the net periodic benefit cost is disclosed in the same income statement line item as other employee compensation costs arising from services rendered during the period, and the other components are reported separately from the line item that includes the service cost and outside of any subtotal of operating income. ASU 2017-07 is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. FIS adopted the provisions of ASU 2017-07 as of January 1, 2018. There was no material impact on the Company's Condensed Consolidated Financial Statements (Unaudited) resulting from the adoption of this guidance.
In November 2016, the FASB issued ASU No. 2016-18 (“ASU 2016-18”), “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18requires companies to include restricted amounts with Cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the Statements of Cash Flows. FIS adopted the provisions of ASU 2016-18 as of January 1, 2018. FIS had no restricted cash during 2017 or 2018. As a result, there was no effect on the Company’s Condensed Consolidated Financial Statements (Unaudited).
In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 amends guidance on the classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The amendment requires equity securities to be measured at fair value with changes in fair value recognized through net earnings and amends certain disclosure requirements associated with the fair value of financial instruments. In the period of adoption, the Company is required to reclassify the unrealized gains/losses on equity securities within accumulated other comprehensive income (loss) to retained earnings. In February 2018, the FASB issued ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10),”which clarified certain aspects of the previously issued ASU. FIS adopted the provisions of ASU 2016-01 as of January 1, 2018. As a result, there was no material effect on the Company’s Condensed Consolidated Financial Statements (Unaudited).
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 amends substantially all authoritative literature for revenue recognition, including industry-specific requirements, and converges the guidance under this topic with that of the International Financial Reporting Standards. It also includes guidance on accounting for the incremental costs of obtaining and costs incurred to fulfill a contract with a customer. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. The FASB has issued several amendments to Topic 606, including further guidance on principal versus agent consideration, clarification on identifying performance obligations and accounting for licenses of intellectual property.
The effective date of the standard was postponed to reporting periods beginning after December 15, 2017, with early adoption allowed for reporting periods beginning after December 15, 2016. We adopted the new standard effective January 1, 2018.
Entities can transition to the standard with retrospective application to the earliest years presented in their financial statements, retrospectively using certain practical expedients, or with a cumulative-effect adjustment as of the date of adoption. We adopted the new standard using the retrospective method with the application of certain practical expedients.
The largest impacts from the adoption of Topic 606 on our revenue recognition are related to the following areas:
Certain revenues, particularly those related to interchange and third-party network fees associated with our payment processing business, previously recorded on a gross basis as a principal are now recorded on a net basis as an agent to the extent the Company does not control the good or service before it is transferred to the customer.
Recognition of certain term license early renewals are now deferred until the conclusion of the term in effect at the time of renewal. Previously, term license early renewals were generally recognized upon execution of the renewal agreement.
We now recognize the license portion of software rental fees in certain of our global trading, asset management, and securities processing businesses upon delivery. Previously, software license rental fees were recognized ratably over the rental period as the payments became due and payable.
Impacts related to other changes introduced by the standard were substantially less significant than those listed above.
Upon retrospective application of Topic 606, our revenue decreased by approximately $455 million and $410 million and net earnings decreased approximately $58 million and $43 million for the years ended December 31, 2017 and 2016, respectively. We recorded a net reduction to opening retained earnings of approximately $23 million as of January 1, 2016 due to the cumulative impact of adopting the standard. The impact of Topic 606 on our 2017 and 2016 operating results may or may not be representative of the impact on subsequent years’ results.
Recent Accounting Guidance Not Yet Adopted
On February 25, 2016, the FASB issued ASU No. 2016-02, “LeasesLeases (Topic 842),” which requires lessees to recognize leases on-balanceon the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, “LandLand Easement Practical Expedient for Transition to Topic 842;”842; ASU No. 2018-10, “CodificationCodification Improvements to Topic 842, Leases;” Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors; and ASU No. 2018-11, “Targeted Improvements”2019-1, Leases (Topic 842): Codification Improvements (collectively, the “new standard”"new standard"). The new standard establishes a right-of-use ("ROU") model (ROU) that requires a lessee to recognize aan ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will beare classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Under the new standard, lessor accounting is largely unchanged.
The new standard is effective for public business entities on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date (the "effective date method") or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We will adoptFIS adopted the new standard oneffective January 1, 2019 and useusing the effective date as our date of initial application.method. Consequently, financial information willwas not be updated and the disclosures required under the new standard willwere not be provided for dates and periods before January 1, 2019.
The new standard provides a number ofseveral optional practical expedients in transition.transition and for an entity’s ongoing accounting. We expect to electelected the "package of practical expedients," which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We doalso elected the practical expedient not expect to separate lease and non-lease components. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements. The new standard also provides practical expedients for an entity’s ongoing accounting includingnor the short-term lease recognition and measurement exemption and non-separation of lease and non-lease components by asset class. We are currently assessing the extent to which we will elect these practical expedients.exemption.
We expect that this standard will have an immaterial effect on results of operations. While we continue to assess allThe adoption of the effects of adoption, we currently believe the most significant effects relate tonew standard resulted in the recognition of newoperating lease ROU assets and lease liabilities on the Company’s Condensed Consolidated Balance Sheet of $442 million and $446 million, respectively, on January 1, 2019. The standard did not impact our balance sheetresults of operations or cash flows. The Company’s accounting for our real estate operatingfinance leases, which are immaterial, remained substantially unchanged.
On February 14, 2018 the FASB issued ASU No. 2018-02 ("ASU 2018-02"), Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income. ASU 2018-02 allows companies to elect whether to reclassify from accumulated other comprehensive income to retained earnings the tax effects of items within accumulated other comprehensive income, referred to as stranded tax effects, resulting from the Tax Cuts and providing new disclosures about our leasing activities.Jobs Act. FIS adopted ASU 2018-02 on January 1, 2019, and did not elect to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. As a result, the adoption of this ASU did not have an impact on the Company's Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Adopted
On June 16, 2016, the FASB issued ASU No. 2016-13 (“("ASU 2016-13”2016-13"), “Financial Instrument Financial Instruments - Credit Losses (Topic 326): Measurements on Credit Losses of Financial Instruments.”Instruments. This ASU'sASU was subsequently amended by ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (collectively, "Topic 326"). The primary objectives of Topic 326 are to implement new methodology for calculating credit losses on financial instruments (e.g., trade receivables) based on expected credit losses and broadensto broaden the types of information companies must use when calculating the estimated losses. Under current guidance, the credit losses are calculated based on multiple credit impairment objectives and recognition is delayed until the loss is probable to occur. Under the new guidance, financial assets measured at amortized cost basis must be shown as the net amount expected to be collected. The credit loss allowance is a contra-valuation account. Available-for-sale securities should continue to be recognized in a similar manner to current GAAP; however, the allowance should be presented as an allowance instead of a write-down of the basis of the asset. For public business entities, the amendments are effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period beginning after December 15, 2018. We do not plan to early adopt and expect that the new guidance will not have a material impact on our financial statement presentation, financial position, or results of operations.
On August 29, 2018, the FASB issued ASU No. 2018-15 (“("ASU 2018-15”2018-15"), “Intangibles-GoodwillIntangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”Contract. This ASU clarifies that implementation costs incurred by customers in cloud computing arrangements should be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The provisions in ASU 2018-15 should
be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. For public business entities, ASU 2018-15 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. We are currently assessing the impact the adoption of ASU 2018-15 will have on our financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Market Risk
We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We periodically use certain derivative financial instruments, including interest rate swaps and foreign currency forward contracts, to manage interest rate and foreign currency risk. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
Interest Rate Risk
In addition to existing cash balances and cash provided by operating activities, we use fixed-rate and variable-rate debt to finance our operations. We are exposed to interest rate risk on these debt obligations and related interest rate swaps, if any.swaps.
The senior notes as(as described in Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited)) represent substantially allthe majority of our fixed-rate long-term debt obligations as of September 30, 2018.2019. The carrying value, excluding the fair value of the interest rate swap described below and unamortized discounts, of the senior notes was $8,501 million$16.4 billion as of September 30, 2018.2019. The fair value of the senior notes was approximately $8,405 million$17.6 billion as of September 30, 2018.2019. The potential reduction in fair value of the senior notes from a hypothetical 10 percent increase in market interest rates would not be material to the overall fair value of the debt.
Our floating rate long-term debt obligationsrisk principally relaterelates to borrowings under the FISour U.S. commercial paper program, Euro-commercial paper program, Revolving Credit AgreementFacility, Floating Rate Notes (as defined in Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited)). An increase and an interest rate swap on our fixed-rate long-term debt. At September 30, 2019, our
weighted-average cost of debt was 2.4% with a weighted-average maturity of 6.3 years; 77% of our debt was fixed-rate and the remaining 23% of our debt was floating-rate. A 100 basis pointspoint increase in the LIBORweighted-average interest rate on our floating rate debt would increasehave increased our annual debt service under the FIS Credit Agreementinterest expense by approximately $6 million (based on principal amounts outstanding as of September 30, 2018).$47 million. We performed the foregoing sensitivity analysis based solely on the principal amount of our floating rate debt as of September 30, 2018.2019. This sensitivity analysis is based solely on the principal amount of such debt as of September 30, 2018, and does not take into account any changes that occurred in the prior 12 months or that may take place in the next 12 months in the amount of our outstanding debt. Further, in this sensitivity analysis assumes the change in interest rates is assumed to be applicable for an entire year. For comparison purposes, based on principal amounts of floating rate debt outstanding as of September 30, 2017,2018, and calculated in the same manner as set forth above, an increase of 100 basis points in the LIBORweighted-average interest rate would have increased our annual interest expense after we calculate the impact of our interest rate swaps, by approximately $6 million.
As of September 30, 2018, we had no2019, the following interest rate swaps.swap converting the interest rate exposure on our Senior Euro Notes due July 2024 from fixed to variable is outstanding (in millions):
|
| | | | | | | | | | | | |
| | | | | | | Bank pays | | FIS pays |
| Effective Date | | Maturity Date | | Notional | | fixed rate of | | variable rate of |
| December 21, 2018 | | July 15, 2024 | | € | 500 |
| | 1.100 | % | | 3-month Euribor + 0.878% | (1) |
(1) 0.514% in effect as of September 30, 2019.
We designated the interest rate swap as a fair value hedge for accounting purposes as described in Note 8 of the Notes to Condensed Consolidated Financial Statements (Unaudited). A 100 basis point increase in the 3-month Euribor rate would increase our annual interest expense on this swap by approximately $5 million.
Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location's functional currency. We manage the exposure to these risks through a combination of normal operating activities and the use of foreign currency forward contracts and non-derivative and derivative investment hedges. Contracts are denominated in currencies of major industrial countries.
Our exposure to foreign currency exchange risks generally arises from our non-U.S. operations, to the extent they are conducted in local currency. Changes in foreign currency exchange rates affect translations of revenue denominated in currencies other than the U.S. Dollar. DuringWe generated approximately $535 million and $376 million during the three months and $1,162 million and $1,133 million during the nine months ended September 30, 2018, we generated approximately $376 million2019 and $1,133 million,2018, respectively, in revenue denominated in currencies other than the U.S. Dollar. The major currencies to which our revenues are exposed are the Brazilian Real,British Pound Sterling, the Euro, the British Pound SterlingBrazilian Real and the Indian Rupee. A 10% move in average exchange rates for these currencies (assuming a simultaneous and immediate 10% change in all of such rates for the relevant period) would have resulted in the following increase or decrease in our reported revenue for the three and nine months ended September 30, 20182019 and 20172018 (in millions):
| | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| Currency | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
| Pound Sterling | | $ | 8 |
| | $ | 11 |
| | $ | 25 |
| | $ | 33 |
| | $ | 27 |
| | $ | 8 |
| | $ | 44 |
| | $ | 25 |
|
| Euro | | 8 |
| | 8 |
| | 22 |
| | 27 |
| | 8 |
| | 8 |
| | 22 |
| | 22 |
|
| Real | | 9 |
| | 10 |
| | 27 |
| | 29 |
| | 4 |
| | 9 |
| | 12 |
| | 27 |
|
| Indian Rupee | | 3 |
| | 4 |
| | 10 |
| | 10 |
| |
| Rupee | | | 3 |
| | 3 |
| | 9 |
| | 10 |
|
| Total increase or decrease | | $ | 28 |
| | $ | 33 |
| | $ | 84 |
| | $ | 99 |
| | $ | 42 |
| | $ | 28 |
| | $ | 87 |
| | $ | 84 |
|
While our results of operations have been impacted by the effects of currency fluctuations, our international operations' revenue and expenses are generally denominated in local currency, which reduces our economic exposure to foreign exchange risk in those jurisdictions.
Revenue included $30$19 million and $9$63 million of unfavorable foreign currency impact during the three and nine months ended September 30, 2018,2019 resulting from changes in the U.S. Dollar during the 2019 period as compared to 2018. Net earnings attributable to FIS common stockholders included $0 million and $4 million of unfavorable foreign currency impact during the
three and nine months ended September 30, 2019, respectively, resulting from changes in the U.S. Dollar during 2018the 2019 period as compared to 2017. Net earnings attributable to FIS common stockholders included $5 million and $5 million of unfavorable foreign currency impact during the three and nine months ended September 30, 2018. For the full year of 2018,2019, we anticipate an approximate $55$78 million adverse impact to revenue due to foreign currency translation.translation, although the actual amount of impact is uncertain due to the many factors that affect exchange rates.
Our foreign exchange risk management policy permits the use of derivative instruments, such as forward contracts and options, to reduce volatility in our results of operations and/or cash flows resulting from foreign exchange rate fluctuations. We do not enter into foreign currency derivative instruments for trading purposes or to engage in speculative activity. We do periodically enter into foreign currency forward exchange contracts to hedge foreign currency exposure to intercompany loans. We did not have significantloans and other balance sheet items. During the second quarter of 2019, we entered into foreign currency forward exchange contracts to reduce the volatility in the Company's cash flows due to foreign exchange rate fluctuations during the period leading up to the Company’s Euro- and Pound Sterling-denominated debt issuances related to the Worldpay acquisition, as discussed in Note 8 of September 30, 2018.the Notes to Condensed Consolidated Financial Statements (Unaudited). The Company also utilizes non-derivativeforeign currency denominated debt and cross-currency interest rate swaps designated as net investment hedges in order to reduce the volatility inof the income statement caused by the changes in foreign currency exchange ratesnet investment value of certain of its Euro and Pound Sterling functional subsidiaries (see Note 8 of the Notes to Condensed Consolidated Financial Statements (Unaudited)).
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and (b) accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
We completed the Worldpay acquisition on July 31, 2019 (see Note 3 of the Notes to Condensed Consolidated Financial Statements (Unaudited)). The scope of management’s assessment of the effectiveness of the Company’s disclosure controls and procedures did not include the internal controls over financial reporting of Worldpay. This exclusion is in accordance with the SEC Staff’s general guidance that an assessment of a recently acquired business may be omitted from the scope of management’s assessment for one year following the acquisition. Worldpay represented approximately 26% of our gross revenue for the quarter ended September 30, 2019. Total assets of the acquired business as of September 30, 2019 represented approximately 73% of total consolidated assets, consisting principally of goodwill and other intangible assets.
As a result of the closing of the Worldpay acquisition, we have incorporated internal controls over significant processes specific to the acquisition that we believe are appropriate and necessary in consideration of the level of related integration. As the post-closing integration continues, we will continue to review the internal controls and processes of Worldpay and may take further steps to integrate such controls and processes with those of the Company.
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, in connection with the adoptionreporting, other than described above.
Part II: OTHER INFORMATION
Item 1A. Risk Factors
See “ItemItem 1A. Risk Factors” Factors in our Annual Report on Form 10-K for the year ended December 31, 20172018 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 for a detailed discussion of risk factors affecting the Company. There have been no material changes in the Risk Factors described therein except as detailed below:
The following new risk factor replacesReferendum on the United Kingdom’s Membership in its entirety the risk factorEuropean Union could cause disruption to and create uncertainty surrounding our business.
Significant portions of our Merchant Solutions business are located in, and service clients in, the United Kingdom. We also have other business and operations in the United Kingdom and the European Union. The referendum on the United Kingdom’s membership in the European Union, which we refer to as Brexit, approving the exit of the United Kingdom from the European Union could cause disruption to and create uncertainty surrounding our Form 10-K for the year-ended December 31, 2017, titled, “Webusiness, including affecting relationships with existing and future clients, suppliers and employees, which could have a substantial investmentmaterial adverse effect on the business, financial results and operations. The effects of Brexit will depend on the agreements, if any, the United Kingdom makes with the European Union to retain access to European Union markets at the time Brexit takes effect. Recently, the United Kingdom government agreed to a revised withdrawal agreement with the other members of the European Union. However, the United Kingdom parliament rejected the government's expedited timetable for passing legislation in our Brazilian Venture and obtain significant revenue through that venture that would be lost and result in significant termination costs if our venture partner were to terminate the agreement,relation to the extent not replaced by further commercial agreements.”withdrawal agreement and, accordingly, the Brexit deadline has been extended to January 31, 2020. There can be no assurance that the withdrawal agreement will pass the United Kingdom parliament and, therefore, the United Kingdom may leave the European Union on January 31, 2020 without a withdrawal agreement in place (a "no deal" scenario). Additionally, the United Kingdom is scheduled to hold a general election on December 12, 2019, the outcome of which is uncertain and may lead to the election of a parliament that could vote in favor of a no deal scenario. Actions to implement Brexit may also create global economic uncertainty, which may cause clients to closely monitor their costs and reduce their spending on our solutions and services.
The future resultsAlthough the potential impact of Brexit on our Brazilian operations may not meet our financial goals followingbusiness cannot be fully assessed until the unwindingdetailed terms of the Brazilian Venture.
On September 28, 2018, FIS entered into an agreementUnited Kingdom’s withdrawal from the European Union are finalized and the United Kingdom negotiates, concludes and implements successor trading arrangements with Banco Bradesco to unwind the Brazilian Venture. Underother countries, it is likely that this agreement, the Brazilian Venturewithdrawal process will spin-off certain assets of the business that also provide services to non-Bradesco clients to a new wholly-owned FIS subsidiary. The subsidiary will enter into a long-term commercial agreement to provide current and new services to Banco Bradesco that include software application licensing and management, card portfolio migration, business process outsourcing, fraud management and professional services. Banco Bradesco will then own 100% of the entity that previously housed the Brazilian Venture and its remaining assets that relate to card processing for Banco Bradesco, which Banco Bradesco will thereafter perform internally. FIS expects to complete the transaction in the first half of 2019. Post-closing, the transaction is expectedcontinue to result in an annualized reduction in FIS’ reported revenuea sustained period of approximately $200 million with minimal impacteconomic and political uncertainty and complexity.
These developments, or the perception that any of them could occur, have had and may continue to its net earnings.
While FIS expects the net earnings from current non-Bradesco customershave a material adverse effect on global economic conditions and the currentstability of global financial markets, and new services providedcould significantly reduce global market liquidity and restrict the ability of key market participants to Bradesco by FISoperate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to substantiallyincreased market volatility. Lack of clarity about future United Kingdom laws and regulations as the United Kingdom determines which European Union laws to replace or replicate in the net earnings lost fromevent of a withdrawal, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, competition laws, immigration laws and employment laws, could decrease foreign direct investment in the unwinding ofUnited Kingdom, increase costs, depress economic activity and restrict our access to capital. If the Brazilian Venture, no assurance can be made in this regard,United Kingdom and FIS may failthe European Union are unable to meet its financial goals to grownegotiate acceptable withdrawal terms or if other European Union member states pursue withdrawal, barrier-free access between the business followingUnited Kingdom and other European Union member states or among the closing of the transaction. Further, it is possible that existing non-Bradesco clients may reduce the amount of services we perform for them following the unwinding of the Brazilian Venture. In addition, the costs of unwinding the Brazilian Venture or of operating in Brazil on a stand-alone basisEuropean economic area overall could be higher than we anticipate.
For further detaildiminished or eliminated. Any of these factors could have a direct or indirect impact on our Brazilian Venture see Note 10 ofbusiness in the Notes to Condensed Consolidated Financial Statements (Unaudited) includedUnited Kingdom and the broader European Union, on our suppliers and customers in this reportthe United Kingdom and the broader European Union and on Form 10-Q.our business outside the United Kingdom and the broader European Union, which could have a material adverse effect on our business, business opportunities, financial condition, cash flows and operating results.
Item 2. Unregistered Sales
The following table summarizes purchases of equity securities by the issuer during the three-month period ended September 30, 2018:
|
| | | | | | | | | | | | | | | |
| | | | | | | | | Approximate dollar |
| | | | | | | | | value of shares that |
| | | | | | | Total cost of shares | | may yet be |
| | | | | | | purchased as part of | | purchased under |
| | | Total number of | | | | publicly announced | | the plans or |
| | | shares purchased | | Average price | | plans or programs | | programs (1) |
| Period | | (in millions) | | paid per share | | (in millions) | | (in millions) |
| July 2018 | | 1.9 |
| | $ | 107.37 |
| | $ | 200 |
| | $ | 3,094 |
|
| August 2018 | | 1.7 |
| | $ | 105.41 |
| | 175 |
| | $ | 2,919 |
|
| September 2018 | | 0.8 |
| | $ | 109.28 |
| | 90 |
| | $ | 2,830 |
|
| | | 4.3 |
| | | | $ | 465 |
| | |
Amounts in table may not sum or calculate due to rounding.
| |
(1) | Our Board of Directors has approved a series of plans authorizing repurchases of our common stock in the open market at prevailing market prices or in privately negotiated transactions, the most current of which on July 20, 2017, authorized repurchases of up to $4.0 billion through December 31, 2020. This share repurchase authorization replaced any existing share repurchase authorization plan. Approximately $2.8 billion of plan capacity remained available for repurchases as of September 30, 2018. |
Item 6. Exhibits
(a) Exhibits:
|
| | | | | | | |
| | | Incorporated by Reference | |
| Exhibit | | | SEC File | | | Filed/ Furnished |
| No. | Exhibit Description | Form | Number | Exhibit | Filing Date | Herewith |
| 31.1 |
| | | | | | * |
| 31.2 |
| | | | | | * |
| 32.1 |
| | | | | | * |
| 32.2 |
| | | | | | * |
101.INS+101.INS | XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | * |
101.SCH+101.SCH | Inline XBRL Taxonomy Extension Schema Document. | | | | | * |
101.CAL+101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | * |
101.DEF+101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | * |
101.LAB+101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | | * |
101.PRE+101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | * |
* Filed or furnished herewith
+ Pursuant to Rule 406T
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | FIDELITY NATIONAL INFORMATION SERVICES, INC. |
Date: October 30, 2018November 5, 2019 | By: | /s/ JAMES W. WOODALL |
| | | James W. Woodall |
| | | Corporate Executive Vice President and Chief Financial Officer (Principal Financial Officer ) |
|
| | |
| | FIDELITY NATIONAL INFORMATION SERVICES, INC. |
Date: October 30, 2018November 5, 2019 | By: | /s/ KATY T.CHRISTOPHER THOMPSON |
| | | Katy T.Christopher Thompson |
| | | Corporate Senior Vice President and Chief Accounting Officer
(Principal (Principal Accounting Officer)
|
FIDELITY NATIONAL INFORMATION SERVICES, INC.
FORM 10-Q
INDEX TO EXHIBITS
|
| | | | | | | |
| | Incorporated by Reference | |
Exhibit | | | SEC File | | | Filed/ Furnished |
No. | Exhibit Description | Form | Number | Exhibit | Filing Date | Herewith |
31.1 |
| | | | | | * |
31.2 |
| | | | | | * |
32.1 |
| | | | | | * |
32.2 |
| | | | | | * |
101.INS+ | XBRL Instance Document. | | | | | * |
101.SCH+ | XBRL Taxonomy Extension Schema Document. | | | | | * |
101.CAL+ | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | * |
101.DEF+ | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | * |
101.LAB+ | XBRL Taxonomy Extension Label Linkbase Document. | | | | | * |
101.PRE+ | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | * |
* Filed or furnished herewith
+ Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.